Meihua International Medical Technologies (NASDAQ:MHUA) May Have Issues Allocating Its Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. 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.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Meihua International Medical Technologies, this is the formula:

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).

So, Meihua International Medical Technologies has an ROCE of 9.7%. On its own, that's a low figure but it's around the 8.3% average generated by the Medical Equipment industry.

See our latest analysis for Meihua International Medical Technologies

Historical performance is a great place to start when researching a stock so above you can see the gauge for Meihua International Medical Technologies' ROCE against it's prior returns. If you're interested in investigating Meihua International Medical Technologies' past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Meihua International Medical Technologies' historical ROCE movements, the trend isn't fantastic. Around four years ago the returns on capital were 37%, but since then they've fallen to 9.7%. 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.

The Key Takeaway

We're a bit apprehensive about Meihua International Medical Technologies because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Unsurprisingly then, the stock has dived 83% over the last year, so investors are recognizing these changes and don't like the company's prospects. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with Meihua International Medical Technologies (including 1 which doesn't sit too well with us) .

While Meihua International Medical Technologies 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.