Sansure Biotech (SHSE:688289) Could Be Struggling To Allocate Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Sansure Biotech (SHSE:688289), it didn't seem to tick all of these boxes.

Understanding 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. Analysts use this formula to calculate it for Sansure Biotech:

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

0.0049 = CN¥39m ÷ (CN¥8.6b - CN¥671m) (Based on the trailing twelve months to June 2024).

Thus, Sansure Biotech has an ROCE of 0.5%. 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 Sansure Biotech

In the above chart we have measured Sansure Biotech'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 Sansure Biotech for free.

What Can We Tell From Sansure Biotech's ROCE Trend?

On the surface, the trend of ROCE at Sansure Biotech doesn't inspire confidence. To be more specific, ROCE has fallen from 3.9% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Sansure Biotech has done well to pay down its current liabilities to 7.8% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Sansure Biotech's ROCE

In summary, we're somewhat concerned by Sansure Biotech's diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 36% from where it was three years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Sansure Biotech (of which 1 is concerning!) that you should know about.

While Sansure Biotech may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.