Returns On Capital At Wuhan Huakang Century Medical (SZSE:301235) Have Hit The Brakes

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 Wuhan Huakang Century Medical (SZSE:301235), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. Analysts use this formula to calculate it for Wuhan Huakang Century Medical:

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

0.062 = CN¥109m ÷ (CN¥2.8b - CN¥1.1b) (Based on the trailing twelve months to September 2023).

Thus, Wuhan Huakang Century Medical has an ROCE of 6.2%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 8.5%.

See our latest analysis for Wuhan Huakang Century Medical

In the above chart we have measured Wuhan Huakang Century Medical's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Wuhan Huakang Century Medical for free.

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at Wuhan Huakang Century Medical. Over the past five years, ROCE has remained relatively flat at around 6.2% and the business has deployed 332% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Our Take On Wuhan Huakang Century Medical's ROCE

As we've seen above, Wuhan Huakang Century Medical's returns on capital haven't increased but it is reinvesting in the business. Since the stock has declined 50% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Wuhan Huakang Century Medical has the makings of a multi-bagger.

If you want to know some of the risks facing Wuhan Huakang Century Medical we've found 3 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

While Wuhan Huakang Century Medical 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.