Whole Shine Medical Technology (SZSE:002622) Is Experiencing Growth In Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So on that note, Whole Shine Medical Technology (SZSE:002622) looks quite promising in regards to its trends of return on capital.

What Is 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 Whole Shine Medical Technology, this is the formula:

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

0.11 = CN¥67m ÷ (CN¥1.5b - CN¥894m) (Based on the trailing twelve months to March 2024).

Thus, Whole Shine Medical Technology has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Healthcare industry average of 9.6%.

View our latest analysis for Whole Shine 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'd like to look at how Whole Shine Medical Technology has performed in the past in other metrics, you can view this free graph of Whole Shine Medical Technology's past earnings, revenue and cash flow.

So How Is Whole Shine Medical Technology's ROCE Trending?

Like most people, we're pleased that Whole Shine Medical Technology is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 11% which is no doubt a relief for some early shareholders. Additionally, the business is utilizing 56% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. Whole Shine Medical Technology could be selling under-performing assets since the ROCE is improving.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 59% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

What We Can Learn From Whole Shine Medical Technology's ROCE

In summary, it's great to see that Whole Shine Medical Technology has been able to turn things around and earn higher returns on lower amounts of capital. And since the stock has fallen 54% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

If you'd like to know more about Whole Shine Medical Technology, we've spotted 2 warning signs, and 1 of them shouldn't be ignored.

While Whole Shine Medical Technology 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.