Capital Allocation Trends At Lepu Medical Technology (Beijing) (SZSE:300003) Aren't Ideal

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 Lepu Medical Technology (Beijing) (SZSE:300003), we don't think it's current trends fit the mold of a multi-bagger.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Lepu Medical Technology (Beijing) is:

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

0.066 = CN¥1.4b ÷ (CN¥26b - CN¥3.7b) (Based on the trailing twelve months to March 2024).

Therefore, Lepu Medical Technology (Beijing) has an ROCE of 6.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.7%.

Check out our latest analysis for Lepu Medical Technology (Beijing)

Above you can see how the current ROCE for Lepu Medical Technology (Beijing) compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Lepu Medical Technology (Beijing) for free.

How Are Returns Trending?

In terms of Lepu Medical Technology (Beijing)'s historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 17%, but since then they've fallen to 6.6%. And considering revenue has dropped while employing more capital, we'd be cautious. 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.

On a side note, Lepu Medical Technology (Beijing) has done well to pay down its current liabilities to 14% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Lepu Medical Technology (Beijing)'s ROCE

In summary, we're somewhat concerned by Lepu Medical Technology (Beijing)'s diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 29% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Lepu Medical Technology (Beijing) does have some risks though, and we've spotted 1 warning sign for Lepu Medical Technology (Beijing) that you might be interested in.

While Lepu Medical Technology (Beijing) 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.