Returns On Capital Signal Tricky Times Ahead For LEPU ScienTech Medical Technology (Shanghai) (HKG:2291)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at LEPU ScienTech Medical Technology (Shanghai) (HKG:2291) and its ROCE trend, we weren't exactly thrilled.

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 LEPU ScienTech Medical Technology (Shanghai):

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

0.12 = CN¥234m ÷ (CN¥2.1b - CN¥266m) (Based on the trailing twelve months to June 2024).

So, LEPU ScienTech Medical Technology (Shanghai) has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 8.5% generated by the Medical Equipment industry.

See our latest analysis for LEPU ScienTech Medical Technology (Shanghai)

Historical performance is a great place to start when researching a stock so above you can see the gauge for LEPU ScienTech Medical Technology (Shanghai)'s ROCE against it's prior returns. 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?

On the surface, the trend of ROCE at LEPU ScienTech Medical Technology (Shanghai) doesn't inspire confidence. Over the last four years, returns on capital have decreased to 12% from 27% four years ago. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, LEPU ScienTech Medical Technology (Shanghai) has done well to pay down its current liabilities to 12% 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.

What We Can Learn From LEPU ScienTech Medical Technology (Shanghai)'s ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for LEPU ScienTech Medical Technology (Shanghai). These growth trends haven't led to growth returns though, since the stock has fallen 33% over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you'd like to know about the risks facing LEPU ScienTech Medical Technology (Shanghai), we've discovered 1 warning sign that you should be aware of.

While LEPU ScienTech Medical Technology (Shanghai) may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.