Investors Could Be Concerned With Meihua International Medical Technologies' (NASDAQ:MHUA) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Meihua International Medical Technologies (NASDAQ:MHUA) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Meihua International Medical Technologies is:

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

0.097 = US$14m ÷ (US$163m - US$23m) (Based on the trailing twelve months to June 2023).

Therefore, Meihua International Medical Technologies has an ROCE of 9.7%. Even though it's in line with the industry average of 9.5%, it's still a low return by itself.

View our latest analysis for Meihua International Medical Technologies

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're interested in investigating Meihua International Medical Technologies' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Meihua International Medical Technologies Tell Us?

When we looked at the ROCE trend at Meihua International Medical Technologies, we didn't gain much confidence. To be more specific, ROCE has fallen from 37% over the last four years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for Meihua International Medical Technologies have fallen, meanwhile the business is employing more capital than it was four years ago. This could explain why the stock has sunk a total of 94% in the last year. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Meihua International Medical Technologies does have some risks, we noticed 4 warning signs (and 2 which shouldn't be ignored) we think you should know about.

While Meihua International Medical Technologies isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.