Capital Allocation Trends At Chison Medical Technologies (SHSE:688358) Aren't Ideal

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Although, when we looked at Chison Medical Technologies (SHSE:688358), it didn't seem to tick all of these boxes.

What Is 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. Analysts use this formula to calculate it for Chison Medical Technologies:

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

0.062 = CN¥85m ÷ (CN¥1.6b - CN¥222m) (Based on the trailing twelve months to June 2024).

Therefore, Chison Medical Technologies has an ROCE of 6.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.8%.

View our latest analysis for Chison Medical Technologies

Above you can see how the current ROCE for Chison Medical Technologies 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 Chison Medical Technologies for free.

What Does the ROCE Trend For Chison Medical Technologies Tell Us?

On the surface, the trend of ROCE at Chison Medical Technologies doesn't inspire confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 6.2%. However it looks like Chison Medical Technologies might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Chison Medical Technologies' ROCE

In summary, Chison Medical Technologies is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 22% in the last three years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you'd like to know about the risks facing Chison Medical Technologies, we've discovered 1 warning sign that you should be aware of.

While Chison Medical Technologies 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.