There Are Reasons To Feel Uneasy About LEPU ScienTech Medical Technology (Shanghai)'s (HKG:2291) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. In light of that, when we looked at LEPU ScienTech Medical Technology (Shanghai) (HKG:2291) and its ROCE trend, we weren't exactly thrilled.

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. 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)

0.085 = CN¥165m ÷ (CN¥2.0b - CN¥59m) (Based on the trailing twelve months to December 2023).

So, LEPU ScienTech Medical Technology (Shanghai) has an ROCE of 8.5%. In absolute terms, that's a low return but it's around the Medical Equipment industry average of 8.4%.

See 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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of LEPU ScienTech Medical Technology (Shanghai).

What Can We Tell From LEPU ScienTech Medical Technology (Shanghai)'s ROCE Trend?

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 25% over the last four years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, LEPU ScienTech Medical Technology (Shanghai) has decreased its current liabilities to 3.0% of total assets. So we could link some of this to the decrease in ROCE. 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

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. And there could be an opportunity here if other metrics look good too, because the stock has declined 47% in the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

On a final note, we've found 1 warning sign for LEPU ScienTech Medical Technology (Shanghai) that we think 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.