Ningbo Tianyi Medical Appliance (SZSE:301097) Could Be Struggling To Allocate Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Ningbo Tianyi Medical Appliance (SZSE:301097), we don't think it's current trends fit the mold of a multi-bagger.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Ningbo Tianyi Medical Appliance is:

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

0.026 = CN¥37m ÷ (CN¥1.7b - CN¥314m) (Based on the trailing twelve months to September 2023).

Thus, Ningbo Tianyi Medical Appliance has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 9.2%.

Check out our latest analysis for Ningbo Tianyi Medical Appliance

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Ningbo Tianyi Medical Appliance.

So How Is Ningbo Tianyi Medical Appliance's ROCE Trending?

In terms of Ningbo Tianyi Medical Appliance's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 2.6% from 21% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Ningbo Tianyi Medical Appliance's ROCE

Bringing it all together, while we're somewhat encouraged by Ningbo Tianyi Medical Appliance's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 36% in the last year. 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'd like to know more about Ningbo Tianyi Medical Appliance, we've spotted 3 warning signs, and 1 of them is a bit unpleasant.

While Ningbo Tianyi Medical Appliance isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.