Returns On Capital Signal Tricky Times Ahead For Shandong Weigao Orthopaedic Device (SHSE:688161)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 Shandong Weigao Orthopaedic Device (SHSE:688161) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Shandong Weigao Orthopaedic Device:

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

0.0098 = CN¥40m ÷ (CN¥5.1b - CN¥1.1b) (Based on the trailing twelve months to June 2024).

Thus, Shandong Weigao Orthopaedic Device has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 5.8%.

See our latest analysis for Shandong Weigao Orthopaedic Device

Above you can see how the current ROCE for Shandong Weigao Orthopaedic Device 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 Shandong Weigao Orthopaedic Device for free.

What Can We Tell From Shandong Weigao Orthopaedic Device's ROCE Trend?

In terms of Shandong Weigao Orthopaedic Device's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 23% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

In Conclusion...

In summary, we're somewhat concerned by Shandong Weigao Orthopaedic Device's diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last three years have experienced a 61% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Like most companies, Shandong Weigao Orthopaedic Device does come with some risks, and we've found 1 warning sign that you should be aware of.

While Shandong Weigao Orthopaedic Device isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.