Lepu Medical Technology (Beijing) (SZSE:300003) Is Reinvesting At Lower Rates Of Return

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Lepu Medical Technology (Beijing) (SZSE:300003) and its ROCE trend, we weren't exactly thrilled.

What Is 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. 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)

0.042 = CN¥949m ÷ (CN¥25b - CN¥2.6b) (Based on the trailing twelve months to September 2024).

So, Lepu Medical Technology (Beijing) has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 5.9%.

See 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 to see what analysts are forecasting going forward, you should check out our free analyst report for Lepu Medical Technology (Beijing) .

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Lepu Medical Technology (Beijing), we didn't gain much confidence. Around five years ago the returns on capital were 18%, but since then they've fallen to 4.2%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Lepu Medical Technology (Beijing) has done well to pay down its current liabilities to 11% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for Lepu Medical Technology (Beijing) have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 60% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing: We've identified 2 warning signs with Lepu Medical Technology (Beijing) (at least 1 which is significant) , and understanding them would certainly be useful.

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.

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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.