Micro-Tech (Nanjing)Ltd (SHSE:688029) Is Reinvesting At Lower Rates Of Return

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Having said that, from a first glance at Micro-Tech (Nanjing)Ltd (SHSE:688029) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Micro-Tech (Nanjing)Ltd is:

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

0.15 = CN¥561m ÷ (CN¥4.2b - CN¥552m) (Based on the trailing twelve months to December 2023).

Therefore, Micro-Tech (Nanjing)Ltd has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 9.2% generated by the Medical Equipment industry.

See our latest analysis for Micro-Tech (Nanjing)Ltd

Above you can see how the current ROCE for Micro-Tech (Nanjing)Ltd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Micro-Tech (Nanjing)Ltd for free.

How Are Returns Trending?

In terms of Micro-Tech (Nanjing)Ltd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 15% from 32% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Micro-Tech (Nanjing)Ltd has decreased its current liabilities to 13% 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.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Micro-Tech (Nanjing)Ltd. These growth trends haven't led to growth returns though, since the stock has fallen 47% over the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a separate note, we've found 1 warning sign for Micro-Tech (Nanjing)Ltd you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.