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

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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 who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.077 = US$11m ÷ (US$179m - US$30m) (Based on the trailing twelve months to June 2024).

Thus, Meihua International Medical Technologies has an ROCE of 7.7%. In absolute terms, that's a low return but it's around the Medical Equipment industry average of 9.2%.

Check out 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 covering Meihua International Medical Technologies' past earnings, revenue and cash flow.

What Can We Tell From Meihua International Medical Technologies' ROCE Trend?

On the surface, the trend of ROCE at Meihua International Medical Technologies doesn't inspire confidence. Around five years ago the returns on capital were 37%, but since then they've fallen to 7.7%. However it looks like Meihua International Medical Technologies might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Meihua International Medical Technologies' ROCE

In summary, Meihua International Medical Technologies is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 46% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Meihua International Medical Technologies has the makings of a multi-bagger.

Meihua International Medical Technologies does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are concerning...

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.