Returns On Capital At China Isotope & Radiation (HKG:1763) Paint A Concerning Picture

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at China Isotope & Radiation (HKG:1763), 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. Analysts use this formula to calculate it for China Isotope & Radiation:

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

0.091 = CN¥585m ÷ (CN¥9.2b - CN¥2.8b) (Based on the trailing twelve months to December 2020).

So, China Isotope & Radiation has an ROCE of 9.1%. Even though it's in line with the industry average of 9.2%, it's still a low return by itself.

Check out our latest analysis for China Isotope & Radiation

Above you can see how the current ROCE for China Isotope & Radiation compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For China Isotope & Radiation Tell Us?

In terms of China Isotope & Radiation's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 9.1% from 29% five years ago. However it looks like China Isotope & Radiation might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, China Isotope & Radiation has done well to pay down its current liabilities to 30% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On China Isotope & Radiation's ROCE

Bringing it all together, while we're somewhat encouraged by China Isotope & Radiation's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 45% over the last year. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Like most companies, China Isotope & Radiation does come with some risks, and we've found 1 warning sign that you should be aware of.

While China Isotope & Radiation 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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