Returns On Capital At Beijing Chunlizhengda Medical Instruments (HKG:1858) 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'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Beijing Chunlizhengda Medical Instruments (HKG:1858), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.085 = CN¥245m ÷ (CN¥3.4b - CN¥485m) (Based on the trailing twelve months to September 2023).

So, Beijing Chunlizhengda Medical Instruments has an ROCE of 8.5%. In absolute terms, that's a low return but it's around the Medical Equipment industry average of 9.9%.

See our latest analysis for Beijing Chunlizhengda Medical Instruments

Above you can see how the current ROCE for Beijing Chunlizhengda 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, you can check out the forecasts from the analysts covering Beijing Chunlizhengda Medical Instruments here for free.

What The Trend Of ROCE Can Tell Us

In terms of Beijing Chunlizhengda Medical Instruments' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 16%, but since then they've fallen to 8.5%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Beijing Chunlizhengda Medical Instruments' ROCE

Bringing it all together, while we're somewhat encouraged by Beijing Chunlizhengda Medical Instruments' reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 182% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Beijing Chunlizhengda Medical Instruments could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

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.

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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.