Anhui Hongyu Wuzhou Medical ManufacturerLTD (SZSE:301234) Will Want To Turn Around Its Return Trends

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. Although, when we looked at Anhui Hongyu Wuzhou Medical ManufacturerLTD (SZSE:301234), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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 Anhui Hongyu Wuzhou Medical ManufacturerLTD is:

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

0.048 = CN¥36m ÷ (CN¥836m - CN¥81m) (Based on the trailing twelve months to June 2024).

Therefore, Anhui Hongyu Wuzhou Medical ManufacturerLTD has an ROCE of 4.8%. In absolute terms, that's a low return but it's around the Medical Equipment industry average of 5.8%.

Check out our latest analysis for Anhui Hongyu Wuzhou Medical ManufacturerLTD

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'd like to look at how Anhui Hongyu Wuzhou Medical ManufacturerLTD has performed in the past in other metrics, you can view this free graph of Anhui Hongyu Wuzhou Medical ManufacturerLTD's past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at Anhui Hongyu Wuzhou Medical ManufacturerLTD doesn't inspire confidence. Around five years ago the returns on capital were 34%, but since then they've fallen to 4.8%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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, Anhui Hongyu Wuzhou Medical ManufacturerLTD has done well to pay down its current liabilities to 9.7% of total assets. That could partly explain why the ROCE has dropped. 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. 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.

In Conclusion...

In summary, we're somewhat concerned by Anhui Hongyu Wuzhou Medical ManufacturerLTD'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 year ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing to note, we've identified 1 warning sign with Anhui Hongyu Wuzhou Medical ManufacturerLTD and understanding it should be part of your investment process.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.