Returns On Capital Signal Tricky Times Ahead For MeHow Innovative (SZSE:301363)

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Having said that, from a first glance at MeHow Innovative (SZSE:301363) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. To calculate this metric for MeHow Innovative, this is the formula:

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

0.065 = CN¥215m ÷ (CN¥3.6b - CN¥303m) (Based on the trailing twelve months to June 2024).

Therefore, MeHow Innovative has an ROCE of 6.5%. On its own, that's a low figure but it's around the 5.8% average generated by the Medical Equipment industry.

See our latest analysis for MeHow Innovative

Above you can see how the current ROCE for MeHow Innovative compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering MeHow Innovative for free.

What Does the ROCE Trend For MeHow Innovative Tell Us?

On the surface, the trend of ROCE at MeHow Innovative doesn't inspire confidence. Around five years ago the returns on capital were 26%, but since then they've fallen to 6.5%. 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.

What We Can Learn From MeHow Innovative's ROCE

In summary, we're somewhat concerned by MeHow Innovative's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 14% over the last year, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know about the risks facing MeHow Innovative, we've discovered 1 warning sign that you should be aware of.

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.