Returns On Capital At Shanghai Kindly Medical Instruments (HKG:1501) Paint A Concerning Picture

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Shanghai Kindly Medical Instruments (HKG:1501), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

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 Shanghai Kindly Medical Instruments is:

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

0.088 = CN¥116m ÷ (CN¥1.4b - CN¥76m) (Based on the trailing twelve months to June 2021).

Thus, Shanghai Kindly Medical Instruments has an ROCE of 8.8%. On its own, that's a low figure but it's around the 10% average generated by the Medical Equipment industry.

View our latest analysis for Shanghai Kindly Medical Instruments

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shanghai Kindly Medical Instruments' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Shanghai Kindly Medical Instruments, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Shanghai Kindly Medical Instruments doesn't inspire confidence. Over the last four years, returns on capital have decreased to 8.8% from 22% four 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.

Our Take On Shanghai Kindly Medical Instruments' 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 Shanghai Kindly Medical Instruments. These growth trends haven't led to growth returns though, since the stock has fallen 37% over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

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.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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