Here's What's Concerning About Beijing Chunlizhengda Medical Instruments' (HKG:1858) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Beijing Chunlizhengda Medical Instruments (HKG:1858) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Beijing Chunlizhengda Medical Instruments, this is the formula:

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

0.10 = CN¥281m ÷ (CN¥3.4b - CN¥596m) (Based on the trailing twelve months to December 2022).

So, Beijing Chunlizhengda Medical Instruments has an ROCE of 10.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 10.0%.

Check out our latest analysis for Beijing Chunlizhengda Medical Instruments

In the above chart we have measured Beijing Chunlizhengda 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 Beijing Chunlizhengda Medical Instruments.

SWOT Analysis for Beijing Chunlizhengda Medical Instruments

What Does the ROCE Trend For Beijing Chunlizhengda Medical Instruments Tell Us?

In terms of Beijing Chunlizhengda Medical Instruments' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 10.0% from 13% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Beijing Chunlizhengda Medical Instruments' ROCE

In summary, Beijing Chunlizhengda Medical Instruments is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 598% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a final note, we've found 1 warning sign for Beijing Chunlizhengda Medical Instruments that we think you should be aware of.

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.