Be Wary Of LEPU ScienTech Medical Technology (Shanghai) (HKG:2291) And Its Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at LEPU ScienTech Medical Technology (Shanghai) (HKG:2291) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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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. Analysts use this formula to calculate it for LEPU ScienTech Medical Technology (Shanghai):

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

0.13 = CN¥256m ÷ (CN¥2.1b - CN¥84m) (Based on the trailing twelve months to December 2024).

So, LEPU ScienTech Medical Technology (Shanghai) has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Medical Equipment industry average of 8.1% it's much better.

See our latest analysis for LEPU ScienTech Medical Technology (Shanghai)

In the above chart we have measured LEPU ScienTech Medical Technology (Shanghai)'s prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for LEPU ScienTech Medical Technology (Shanghai) .

What The Trend Of ROCE Can Tell Us

In terms of LEPU ScienTech Medical Technology (Shanghai)'s historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 25% over the last five years. 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.

On a side note, LEPU ScienTech Medical Technology (Shanghai) has done well to pay down its current liabilities to 4.1% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that LEPU ScienTech Medical Technology (Shanghai) is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 18% to shareholders over the last year. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you'd like to know more about LEPU ScienTech Medical Technology (Shanghai), we've spotted 2 warning signs, and 1 of them shouldn't be ignored.

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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.