Capital Allocation Trends At Touchstone International Medical Science (SHSE:688013) Aren't Ideal

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Touchstone International Medical Science (SHSE:688013) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Touchstone International Medical Science is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.061 = CN¥34m ÷ (CN¥600m - CN¥44m) (Based on the trailing twelve months to March 2024).

Therefore, Touchstone International Medical Science has an ROCE of 6.1%. Even though it's in line with the industry average of 6.3%, it's still a low return by itself.

Check out our latest analysis for Touchstone International Medical Science

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Touchstone International Medical Science.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Touchstone International Medical Science, we didn't gain much confidence. To be more specific, ROCE has fallen from 31% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Touchstone International Medical Science has decreased its current liabilities to 7.3% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Touchstone International Medical Science's ROCE

To conclude, we've found that Touchstone International Medical Science is reinvesting in the business, but returns have been falling. And in the last three years, the stock has given away 50% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Touchstone International Medical Science has the makings of a multi-bagger.

If you're still interested in Touchstone International Medical Science it's worth checking out our FREE intrinsic value approximation for 688013 to see if it's trading at an attractive price in other respects.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.