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

What trends should we look for it we want to identify stocks that can 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Whole Shine Medical Technology (SZSE:002622) looks quite promising in regards to its trends of return on capital.

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 Whole Shine Medical Technology, this is the formula:

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

0.12 = CN¥78m ÷ (CN¥1.6b - CN¥893m) (Based on the trailing twelve months to September 2024).

So, Whole Shine Medical Technology has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Healthcare industry average of 9.0% it's much better.

View our latest analysis for Whole Shine Medical Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Whole Shine Medical Technology's ROCE against it's prior returns. 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.

What Can We Tell From Whole Shine Medical Technology's ROCE Trend?

It's great to see that Whole Shine Medical Technology has started to generate some pre-tax earnings from prior investments. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 12% on their capital employed. In regards to capital employed, Whole Shine Medical Technology is using 51% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. 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. Essentially the business now has suppliers or short-term creditors funding about 57% of its operations, which isn't ideal. 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.

Our Take On Whole Shine Medical Technology's ROCE

In the end, Whole Shine Medical Technology has proven it's capital allocation skills are good with those higher returns from less amount of capital. Considering the stock has delivered 3.3% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

Whole Shine Medical Technology does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.