Capital Allocation Trends At Double Medical Technology (SZSE:002901) Aren't Ideal

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Double Medical Technology (SZSE:002901) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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 Double Medical Technology:

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

0.0057 = CN¥20m ÷ (CN¥4.6b - CN¥1.1b) (Based on the trailing twelve months to March 2024).

So, Double Medical Technology has an ROCE of 0.6%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 6.1%.

Check out our latest analysis for Double Medical Technology

Above you can see how the current ROCE for Double Medical Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Double Medical Technology .

The Trend Of ROCE

On the surface, the trend of ROCE at Double Medical Technology doesn't inspire confidence. Around five years ago the returns on capital were 27%, but since then they've fallen to 0.6%. 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.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 23%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 0.6%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Double Medical Technology is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 43% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you want to know some of the risks facing Double Medical Technology we've found 2 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.

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.