Shanghai Aohua Photoelectricity Endoscope (SHSE:688212) Might Be Having Difficulty Using Its Capital Effectively

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Shanghai Aohua Photoelectricity Endoscope (SHSE:688212) 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. To calculate this metric for Shanghai Aohua Photoelectricity Endoscope, this is the formula:

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

0.026 = CN¥39m ÷ (CN¥1.7b - CN¥208m) (Based on the trailing twelve months to September 2024).

Therefore, Shanghai Aohua Photoelectricity Endoscope has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 5.9%.

View our latest analysis for Shanghai Aohua Photoelectricity Endoscope

In the above chart we have measured Shanghai Aohua Photoelectricity Endoscope's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Shanghai Aohua Photoelectricity Endoscope .

So How Is Shanghai Aohua Photoelectricity Endoscope's ROCE Trending?

In terms of Shanghai Aohua Photoelectricity Endoscope's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 8.0% over the last five years. 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.

Our Take On Shanghai Aohua Photoelectricity Endoscope's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Shanghai Aohua Photoelectricity Endoscope. Furthermore the stock has climbed 37% over the last three years, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

One final note, you should learn about the 3 warning signs we've spotted with Shanghai Aohua Photoelectricity Endoscope (including 1 which is a bit concerning) .

While Shanghai Aohua Photoelectricity Endoscope 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.