The Returns On Capital At LEPU ScienTech Medical Technology (Shanghai) (HKG:2291) Don't Inspire Confidence

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. 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 LEPU ScienTech Medical Technology (Shanghai) (HKG:2291) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is 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. 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 9.9%.

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 past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of LEPU ScienTech Medical Technology (Shanghai)'s historical ROCE movements, the trend isn't fantastic. Over the last three years, returns on capital have decreased to 6.4% from 27% three 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 2.8% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On LEPU ScienTech Medical Technology (Shanghai)'s ROCE

In summary, despite lower returns in the short term, we're encouraged to see that LEPU ScienTech Medical Technology (Shanghai) is reinvesting for growth and has higher sales as a result. However, total returns to shareholders over the last year have been flat, which could indicate these growth trends potentially aren't accounted for yet by investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One final note, you should learn about the 3 warning signs we've spotted with LEPU ScienTech Medical Technology (Shanghai) (including 1 which is significant) .

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.