Investors Could Be Concerned With Double Medical Technology's (SZSE:002901) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. However, after investigating Double Medical Technology (SZSE:002901), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Double Medical Technology is:

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

0.0022 = CN¥7.8m ÷ (CN¥4.6b - CN¥1.2b) (Based on the trailing twelve months to December 2023).

Therefore, Double Medical Technology has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 6.4%.

View our latest analysis for Double Medical Technology

In the above chart we have measured Double Medical Technology's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Double Medical Technology .

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Double Medical Technology, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 0.2% from 27% five years ago. However it looks like Double Medical Technology 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Double Medical Technology's current liabilities have increased over the last five years to 25% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 0.2%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

What We Can Learn From Double Medical Technology's ROCE

Bringing it all together, while we're somewhat encouraged by Double Medical Technology's reinvestment in its own business, we're aware that returns are shrinking. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. Therefore based on the analysis done in this article, we don't think Double Medical Technology has the makings of a multi-bagger.

On a final note, we've found 2 warning signs for Double Medical Technology that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.