Shanghai Kindly Medical Instruments (HKG:1501) Is Reinvesting At Lower Rates Of Return

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. 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)

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 Shanghai Kindly Medical Instruments is:

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

0.092 = CN¥123m ÷ (CN¥1.4b - CN¥88m) (Based on the trailing twelve months to December 2020).

Therefore, Shanghai Kindly Medical Instruments has an ROCE of 9.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.2%.

See our latest analysis for Shanghai Kindly Medical Instruments

In the above chart we have measured Shanghai Kindly Medical Instruments' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Shanghai Kindly Medical Instruments.

What Does the ROCE Trend For Shanghai Kindly Medical Instruments Tell Us?

When we looked at the ROCE trend at Shanghai Kindly Medical Instruments, we didn't gain much confidence. Around four years ago the returns on capital were 21%, but since then they've fallen to 9.2%. 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

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 43% 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 want to know some of the risks facing Shanghai Kindly Medical Instruments we've found 2 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.

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.
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