Allmed Medical ProductsLtd (SZSE:002950) May Have Issues Allocating Its Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after briefly looking over the numbers, we don't think Allmed Medical ProductsLtd (SZSE:002950) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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. The formula for this calculation on Allmed Medical ProductsLtd is:

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

0.08 = CN¥309m ÷ (CN¥5.2b - CN¥1.3b) (Based on the trailing twelve months to March 2024).

Therefore, Allmed Medical ProductsLtd has an ROCE of 8.0%. In absolute terms, that's a low return but it's around the Medical Equipment industry average of 7.2%.

Check out our latest analysis for Allmed Medical ProductsLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Allmed Medical ProductsLtd's ROCE against it's prior returns. If you're interested in investigating Allmed Medical ProductsLtd's past further, check out this free graph covering Allmed Medical ProductsLtd's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Allmed Medical ProductsLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 8.0% from 13% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

Our Take On Allmed Medical ProductsLtd's ROCE

In summary, we're somewhat concerned by Allmed Medical ProductsLtd's diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 42% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing: We've identified 4 warning signs with Allmed Medical ProductsLtd (at least 1 which is potentially serious) , and understanding them would certainly be useful.

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.