Be Wary Of Shanghai Kindly Medical Instruments (HKG:1501) And Its Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Having said that, from a first glance at Shanghai Kindly Medical Instruments (HKG:1501) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Shanghai Kindly Medical Instruments:

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

0.079 = CN¥116m ÷ (CN¥1.6b - CN¥153m) (Based on the trailing twelve months to December 2021).

Thus, Shanghai Kindly Medical Instruments has an ROCE of 7.9%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 10%.

View our latest analysis for Shanghai Kindly Medical Instruments

Above you can see how the current ROCE for Shanghai Kindly Medical Instruments compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Shanghai Kindly Medical Instruments.

How Are Returns Trending?

On the surface, the trend of ROCE at Shanghai Kindly Medical Instruments doesn't inspire confidence. To be more specific, ROCE has fallen from 21% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Shanghai Kindly Medical Instruments. However, despite the promising trends, the stock has fallen 32% over the last year, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

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

While Shanghai Kindly Medical Instruments 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.