Returns On Capital Signal Tricky Times Ahead For Shanghai Sanyou Medical (SHSE:688085)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Shanghai Sanyou Medical (SHSE:688085), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Shanghai Sanyou Medical, this is the formula:

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

0.0066 = CN¥14m ÷ (CN¥2.3b - CN¥208m) (Based on the trailing twelve months to June 2024).

So, Shanghai Sanyou Medical has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 5.8%.

View our latest analysis for Shanghai Sanyou Medical

In the above chart we have measured Shanghai Sanyou Medical's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Shanghai Sanyou Medical for free.

What Can We Tell From Shanghai Sanyou Medical's ROCE Trend?

The trend of ROCE doesn't look fantastic because it's fallen from 21% five years ago, while the business's capital employed increased by 425%. That being said, Shanghai Sanyou Medical raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Shanghai Sanyou Medical's earnings and if they change as a result from the capital raise.

The Bottom Line On Shanghai Sanyou Medical's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Shanghai Sanyou Medical have fallen, meanwhile the business is employing more capital than it was five years ago. Long term shareholders who've owned the stock over the last three years have experienced a 10% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing to note, we've identified 3 warning signs with Shanghai Sanyou Medical and understanding them should be part of your investment process.

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.