Kontour (Xi'an) Medical Technology (SHSE:688314) Might Be Having Difficulty Using Its Capital Effectively

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. In light of that, when we looked at Kontour (Xi'an) Medical Technology (SHSE:688314) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Kontour (Xi'an) Medical Technology, this is the formula:

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

0.17 = CN¥107m ÷ (CN¥738m - CN¥88m) (Based on the trailing twelve months to September 2024).

Thus, Kontour (Xi'an) Medical Technology has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 5.9% generated by the Medical Equipment industry.

See our latest analysis for Kontour (Xi'an) Medical Technology

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Kontour (Xi'an) Medical Technology's past further, check out this free graph covering Kontour (Xi'an) Medical Technology's past earnings, revenue and cash flow.

What Can We Tell From Kontour (Xi'an) Medical Technology's ROCE Trend?

In terms of Kontour (Xi'an) Medical Technology's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 22% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Kontour (Xi'an) Medical Technology. These growth trends haven't led to growth returns though, since the stock has fallen 36% over the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a separate note, we've found 1 warning sign for Kontour (Xi'an) Medical Technology you'll probably want to know about.

While Kontour (Xi'an) Medical Technology 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.