Sichuan Gangtong Medical Equipment Group (SZSE:301515) Might Be Having Difficulty Using Its Capital Effectively

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Sichuan Gangtong Medical Equipment Group (SZSE:301515) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Sichuan Gangtong Medical Equipment Group, this is the formula:

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

0.035 = CN¥46m ÷ (CN¥2.0b - CN¥605m) (Based on the trailing twelve months to June 2024).

Therefore, Sichuan Gangtong Medical Equipment Group has an ROCE of 3.5%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 5.8%.

See our latest analysis for Sichuan Gangtong Medical Equipment Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sichuan Gangtong Medical Equipment Group's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Sichuan Gangtong Medical Equipment Group.

How Are Returns Trending?

When we looked at the ROCE trend at Sichuan Gangtong Medical Equipment Group, we didn't gain much confidence. Around three years ago the returns on capital were 16%, but since then they've fallen to 3.5%. 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Sichuan Gangtong Medical Equipment Group has decreased its current liabilities to 31% 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. 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...

To conclude, we've found that Sichuan Gangtong Medical Equipment Group is reinvesting in the business, but returns have been falling. And in the last year, the stock has given away 44% so the market doesn't look too hopeful on these trends strengthening any time soon. 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.

Sichuan Gangtong Medical Equipment Group does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

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.