Some Investors May Be Worried About Shanghai Kindly Medical Instruments' (HKG:1501) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. 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. To calculate this metric for Shanghai Kindly Medical Instruments, this is the formula:

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).

So, Shanghai Kindly Medical Instruments has an ROCE of 9.2%. Even though it's in line with the industry average of 9.2%, it's still a low return by itself.

See 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.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Shanghai Kindly Medical Instruments, we didn't gain much confidence. To be more specific, ROCE has fallen from 21% over the last four 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. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

While returns have fallen for Shanghai Kindly Medical Instruments in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 13% 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.

Shanghai Kindly Medical Instruments does have some risks, we noticed 2 warning signs (and 1 which is concerning) we think you should know about.

While Shanghai Kindly Medical Instruments isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. 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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