The Returns On Capital At LifeTech Scientific (HKG:1302) Don't Inspire Confidence

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at LifeTech Scientific (HKG:1302) and its ROCE trend, we weren't exactly thrilled.

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)

0.067 = 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%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 8.8%.

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.

So How Is LifeTech Scientific's ROCE Trending?

In terms of LifeTech Scientific's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 11%, but since then they've fallen to 6.7%. 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. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On LifeTech Scientific's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for LifeTech Scientific. And the stock has done incredibly well with a 134% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

LifeTech Scientific does have some risks though, and we've spotted 3 warning signs for LifeTech Scientific that you might be interested in.

While LifeTech Scientific may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.
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