Returns On Capital Signal Tricky Times Ahead For Guanze Medical Information Industry (Holding) (HKG:2427)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after briefly looking over the numbers, we don't think Guanze Medical Information Industry (Holding) (HKG:2427) 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?

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. To calculate this metric for Guanze Medical Information Industry (Holding), this is the formula:

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

0.086 = CN¥21m ÷ (CN¥277m - CN¥34m) (Based on the trailing twelve months to June 2024).

Thus, Guanze Medical Information Industry (Holding) has an ROCE of 8.6%. In absolute terms, that's a low return but it's around the Healthcare industry average of 8.2%.

View our latest analysis for Guanze Medical Information Industry (Holding)

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 Guanze Medical Information Industry (Holding) has performed in the past in other metrics, you can view this free graph of Guanze Medical Information Industry (Holding)'s past earnings, revenue and cash flow.

What Can We Tell From Guanze Medical Information Industry (Holding)'s ROCE Trend?

When we looked at the ROCE trend at Guanze Medical Information Industry (Holding), we didn't gain much confidence. Over the last four years, returns on capital have decreased to 8.6% from 39% four years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Guanze Medical Information Industry (Holding) has decreased 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 Guanze Medical Information Industry (Holding)'s ROCE

In summary, we're somewhat concerned by Guanze Medical Information Industry (Holding)'s diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 49% from where it was year ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Guanze Medical Information Industry (Holding) does have some risks, we noticed 5 warning signs (and 2 which make us uncomfortable) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.