Capital Allocation Trends At BMC Medical (SZSE:301367) Aren't Ideal

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at BMC Medical (SZSE:301367) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on BMC Medical is:

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

0.034 = CN¥96m ÷ (CN¥3.0b - CN¥201m) (Based on the trailing twelve months to June 2024).

So, BMC Medical has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 6.4%.

See our latest analysis for BMC Medical

Above you can see how the current ROCE for BMC Medical compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for BMC Medical .

How Are Returns Trending?

When we looked at the ROCE trend at BMC Medical, we didn't gain much confidence. Around five years ago the returns on capital were 30%, but since then they've fallen to 3.4%. 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 related note, BMC Medical has decreased its current liabilities to 6.7% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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.

What We Can Learn From BMC Medical's ROCE

In summary, we're somewhat concerned by BMC Medical's diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last year have experienced a 27% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing, we've spotted 2 warning signs facing BMC Medical that you might find interesting.

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.