Some Investors May Be Worried About LifeTech Scientific's (HKG:1302) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential 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. However, after investigating LifeTech Scientific (HKG:1302), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. The formula for this calculation on LifeTech Scientific is:

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

0.067 = CN¥179m ÷ (CN¥3.1b - CN¥414m) (Based on the trailing twelve months to June 2021).

Thus, LifeTech Scientific has an ROCE of 6.7%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 10%.

See 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.

The Trend Of ROCE

When we looked at the ROCE trend at LifeTech Scientific, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 6.7% from 11% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that LifeTech Scientific is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 92% to shareholders over the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

LifeTech Scientific does have some risks though, and we've spotted 1 warning sign for LifeTech Scientific that you might be interested in.

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.