Shanghai Sanyou Medical's (SHSE:688085) Returns On Capital Not Reflecting Well On The Business

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. 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.

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 Shanghai Sanyou Medical is:

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

0.018 = CN¥37m ÷ (CN¥2.3b - CN¥201m) (Based on the trailing twelve months to September 2024).

Therefore, Shanghai Sanyou Medical has an ROCE of 1.8%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 6.0%.

View our latest analysis for Shanghai Sanyou Medical

Above you can see how the current ROCE for Shanghai Sanyou Medical 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 Shanghai Sanyou Medical for free.

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

We weren't thrilled with the trend because Shanghai Sanyou Medical's ROCE has reduced by 92% over the last five years, while the business employed 396% more capital. Usually this isn't ideal, but given Shanghai Sanyou Medical conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Shanghai Sanyou Medical might not have received a full period of earnings contribution from it.

The Key Takeaway

We're a bit apprehensive about Shanghai Sanyou Medical because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Long term shareholders who've owned the stock over the last three years have experienced a 21% 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.

On a separate note, we've found 2 warning signs for Shanghai Sanyou Medical you'll probably want to know about.

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.