Returns On Capital Signal Tricky Times Ahead For Guangdong Biolight Meditech (SZSE:300246)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after investigating Guangdong Biolight Meditech (SZSE:300246), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Guangdong Biolight Meditech is:

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

0.00056 = CN¥1.0m ÷ (CN¥2.6b - CN¥752m) (Based on the trailing twelve months to March 2024).

Thus, Guangdong Biolight Meditech has an ROCE of 0.06%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 6.3%.

See our latest analysis for Guangdong Biolight Meditech

Above you can see how the current ROCE for Guangdong Biolight Meditech 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 Guangdong Biolight Meditech .

What Does the ROCE Trend For Guangdong Biolight Meditech Tell Us?

On the surface, the trend of ROCE at Guangdong Biolight Meditech doesn't inspire confidence. Over the last five years, returns on capital have decreased to 0.06% from 13% five years ago. However it looks like Guangdong Biolight Meditech 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.

What We Can Learn From Guangdong Biolight Meditech's ROCE

In summary, Guangdong Biolight Meditech is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last five years, the stock has given away 31% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you want to continue researching Guangdong Biolight Meditech, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.