The 50% Return On Capital At Perfect Shape Medical (HKG:1830) Got Our Attention

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. And in light of that, the trends we're seeing at Perfect Shape Medical's (HKG:1830) look very promising so lets take a look.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Perfect Shape Medical, this is the formula:

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

0.50 = HK$456m ÷ (HK$1.3b - HK$383m) (Based on the trailing twelve months to March 2020).

Therefore, Perfect Shape Medical has an ROCE of 50%. In absolute terms that's a great return and it's even better than the Consumer Services industry average of 10%.

View our latest analysis for Perfect Shape Medical

Historical performance is a great place to start when researching a stock so above you can see the gauge for Perfect Shape Medical's ROCE against it's prior returns. If you'd like to look at how Perfect Shape Medical has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Perfect Shape Medical's ROCE Trend?

The trends we've noticed at Perfect Shape Medical are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 50%. The amount of capital employed has increased too, by 80%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

What We Can Learn From Perfect Shape Medical's ROCE

In summary, it's great to see that Perfect Shape Medical can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 217% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

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

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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This article by Simply Wall St is general in nature. 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.
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