Returns On Capital At Beijing Chunlizhengda Medical Instruments (HKG:1858) Paint A Concerning Picture

What are the early trends we should look for to identify a stock that could 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Beijing Chunlizhengda Medical Instruments (HKG:1858) 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)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

0.046 = CN¥134m ÷ (CN¥3.5b - CN¥601m) (Based on the trailing twelve months to September 2024).

Thus, Beijing Chunlizhengda Medical Instruments has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 8.5%.

View 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're interested, you can view the analysts predictions in our free analyst report for Beijing Chunlizhengda Medical Instruments .

The Trend Of ROCE

When we looked at the ROCE trend at Beijing Chunlizhengda Medical Instruments, we didn't gain much confidence. To be more specific, ROCE has fallen from 25% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Key Takeaway

From the above analysis, we find it rather worrisome that returns on capital and sales for Beijing Chunlizhengda Medical Instruments have fallen, meanwhile the business is employing more capital than it was five years ago. Long term shareholders who've owned the stock over the last five years have experienced a 66% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Beijing Chunlizhengda Medical Instruments could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 1858 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.