Contec Medical SystemsLtd (SZSE:300869) Might Be Having Difficulty Using Its Capital Effectively

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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 briefly looking over the numbers, we don't think Contec Medical SystemsLtd (SZSE:300869) 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?

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. To calculate this metric for Contec Medical SystemsLtd, this is the formula:

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

0.074 = CN¥206m ÷ (CN¥3.5b - CN¥692m) (Based on the trailing twelve months to September 2023).

Therefore, Contec Medical SystemsLtd has an ROCE of 7.4%. On its own, that's a low figure but it's around the 9.2% average generated by the Medical Equipment industry.

Check out our latest analysis for Contec Medical SystemsLtd

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

What The Trend Of ROCE Can Tell Us

In terms of Contec Medical SystemsLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 9.8% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line

While returns have fallen for Contec Medical SystemsLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. But since the stock has dived 77% in the last three years, there could be other drivers that are influencing the business' outlook. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

On a final note, we've found 2 warning signs for Contec Medical SystemsLtd 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.