LEPU ScienTech Medical Technology (Shanghai) (HKG:2291) May Have Issues Allocating Its 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 LEPU ScienTech Medical Technology (Shanghai) (HKG:2291) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on LEPU ScienTech Medical Technology (Shanghai) is:

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

0.064 = CN¥118m ÷ (CN¥1.9b - CN¥54m) (Based on the trailing twelve months to June 2023).

So, LEPU ScienTech Medical Technology (Shanghai) has an ROCE of 6.4%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 10.0%.

Check out our latest analysis for LEPU ScienTech Medical Technology (Shanghai)

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how LEPU ScienTech Medical Technology (Shanghai) has performed in the past in other metrics, you can view this free graph of LEPU ScienTech Medical Technology (Shanghai)'s past earnings, revenue and cash flow.

So How Is LEPU ScienTech Medical Technology (Shanghai)'s ROCE Trending?

When we looked at the ROCE trend at LEPU ScienTech Medical Technology (Shanghai), we didn't gain much confidence. To be more specific, ROCE has fallen from 27% over the last three 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.

On a side note, LEPU ScienTech Medical Technology (Shanghai) has done well to pay down its current liabilities to 2.8% of total assets. So we could link some of this to the decrease in ROCE. 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.

The Key Takeaway

While returns have fallen for LEPU ScienTech Medical Technology (Shanghai) in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you'd like to know more about LEPU ScienTech Medical Technology (Shanghai), we've spotted 3 warning signs, and 1 of them doesn't sit too well with us.

While LEPU ScienTech Medical Technology (Shanghai) 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. 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.