Here's What's Concerning About Jiangsu Canopus Wisdom Medical TechnologyLtd's (SZSE:301290) Returns On Capital

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. 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 Jiangsu Canopus Wisdom Medical TechnologyLtd (SZSE:301290) 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?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Jiangsu Canopus Wisdom Medical TechnologyLtd, this is the formula:

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

0.023 = CN¥51m ÷ (CN¥2.4b - CN¥175m) (Based on the trailing twelve months to September 2024).

Therefore, Jiangsu Canopus Wisdom Medical TechnologyLtd has an ROCE of 2.3%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 5.9%.

View our latest analysis for Jiangsu Canopus Wisdom Medical TechnologyLtd

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 Jiangsu Canopus Wisdom Medical TechnologyLtd.

What Can We Tell From Jiangsu Canopus Wisdom Medical TechnologyLtd's ROCE Trend?

When we looked at the ROCE trend at Jiangsu Canopus Wisdom Medical TechnologyLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.3% from 8.8% 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.

On a side note, Jiangsu Canopus Wisdom Medical TechnologyLtd has done well to pay down its current liabilities to 7.2% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Jiangsu Canopus Wisdom Medical TechnologyLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Jiangsu Canopus Wisdom Medical TechnologyLtd's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly then, the total return to shareholders over the last year has been flat. 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 Jiangsu Canopus Wisdom Medical TechnologyLtd, you might be interested to know about the 2 warning signs 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.