The Returns On Capital At Beijing Balance Medical TechnologyLtd (SHSE:688198) Don't Inspire Confidence

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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 Beijing Balance Medical TechnologyLtd (SHSE:688198) 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 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 Beijing Balance Medical TechnologyLtd is:

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

0.10 = CN¥121m ÷ (CN¥1.3b - CN¥55m) (Based on the trailing twelve months to December 2023).

Thus, Beijing Balance Medical TechnologyLtd has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 8.5% generated by the Medical Equipment industry.

See our latest analysis for Beijing Balance Medical TechnologyLtd

Above you can see how the current ROCE for Beijing Balance Medical TechnologyLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Beijing Balance Medical TechnologyLtd .

So How Is Beijing Balance Medical TechnologyLtd's ROCE Trending?

When we looked at the ROCE trend at Beijing Balance Medical TechnologyLtd, we didn't gain much confidence. Around five years ago the returns on capital were 21%, but since then they've fallen to 10%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Beijing Balance Medical TechnologyLtd is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 12% gain to shareholders who've held over the last three years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

If you're still interested in Beijing Balance Medical TechnologyLtd it's worth checking out our FREE intrinsic value approximation for 688198 to see if it's trading at an attractive price in other respects.

While Beijing Balance Medical TechnologyLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.