Meihua International Medical Technologies (NASDAQ:MHUA) Is Reinvesting At Lower Rates Of Return

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Meihua International Medical Technologies (NASDAQ:MHUA) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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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 Meihua International Medical Technologies:

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

0.09 = US$14m ÷ (US$186m - US$27m) (Based on the trailing twelve months to December 2024).

Thus, Meihua International Medical Technologies has an ROCE of 9.0%. In absolute terms, that's a low return but it's around the Medical Equipment industry average of 10%.

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Meihua International Medical Technologies.

So How Is Meihua International Medical Technologies' ROCE Trending?

The trend of ROCE doesn't look fantastic because it's fallen from 32% five years ago, while the business's capital employed increased by 166%. That being said, Meihua International Medical Technologies raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Meihua International Medical Technologies might not have received a full period of earnings contribution from it. Additionally, we found that Meihua International Medical Technologies' most recent EBIT figure is around the same as the prior year, so we'd attribute the drop in ROCE mostly to the capital raise.

The Key Takeaway

To conclude, we've found that Meihua International Medical Technologies is reinvesting in the business, but returns have been falling. Moreover, since the stock has crumbled 91% over the last three years, it appears investors are expecting the worst. Therefore based on the analysis done in this article, we don't think Meihua International Medical Technologies has the makings of a multi-bagger.

One more thing: We've identified 4 warning signs with Meihua International Medical Technologies (at least 1 which makes us a bit uncomfortable) , and understanding them would certainly be useful.

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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.