LifeTech Scientific's (HKG:1302) Returns On Capital Not Reflecting Well On The Business

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at LifeTech Scientific (HKG:1302), it didn't seem to tick all of these boxes.

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. The formula for this calculation on LifeTech Scientific is:

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

0.031 = CN¥76m ÷ (CN¥3.0b - CN¥494m) (Based on the trailing twelve months to December 2020).

So, LifeTech Scientific has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 9.2%.

View our latest analysis for LifeTech Scientific

In the above chart we have measured LifeTech Scientific's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering LifeTech Scientific here for free.

What Can We Tell From LifeTech Scientific's ROCE Trend?

On the surface, the trend of ROCE at LifeTech Scientific doesn't inspire confidence. To be more specific, ROCE has fallen from 14% over the last five years. However it looks like LifeTech Scientific might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

To conclude, we've found that LifeTech Scientific is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 262% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a final note, we've found 3 warning signs for LifeTech Scientific that we think 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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