Kangji Medical Holdings' (HKG:9997) Returns On Capital Not Reflecting Well On The Business

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing 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.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Kangji Medical Holdings is:

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

0.12 = CN¥446m ÷ (CN¥4.2b - CN¥364m) (Based on the trailing twelve months to June 2023).

Thus, Kangji Medical Holdings has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 9.9% generated by the Medical Equipment industry.

See 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, you can check out the forecasts from the analysts covering Kangji Medical Holdings here for free.

So How Is Kangji Medical Holdings' ROCE Trending?

In terms of Kangji Medical Holdings' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 12% from 51% five years ago. 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.

The Bottom Line On Kangji Medical Holdings' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Kangji Medical Holdings is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 69% over the last three years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing: We've identified 2 warning signs with Kangji Medical Holdings (at least 1 which doesn't sit too well with us) , and understanding them would certainly be useful.

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.