Investors Could Be Concerned With Kangji Medical Holdings' (HKG:9997) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Kangji Medical Holdings (HKG:9997) 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)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Kangji Medical Holdings:

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

0.11 = CN¥442m ÷ (CN¥4.3b - CN¥191m) (Based on the trailing twelve months to December 2023).

Thus, Kangji Medical Holdings has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 8.4% generated by the Medical Equipment industry.

Check out our latest analysis for Kangji Medical Holdings

In the above chart we have measured Kangji Medical Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Kangji Medical Holdings .

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Kangji Medical Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 46%, but since then they've fallen to 11%. 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.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Kangji Medical Holdings. And there could be an opportunity here if other metrics look good too, because the stock has declined 25% in the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Kangji Medical Holdings does have some risks though, and we've spotted 1 warning sign for Kangji Medical Holdings that you might be interested in.

While Kangji Medical Holdings 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.