Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Shinva Medical Instrument (SHSE:600587) so let's look a bit deeper.
Understanding 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 Shinva Medical Instrument, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = CN¥635m ÷ (CN¥13b - CN¥6.7b) (Based on the trailing twelve months to September 2022).
Therefore, Shinva Medical Instrument has an ROCE of 11%. That's a pretty standard return and it's in line with the industry average of 11%.
View our latest analysis for Shinva Medical Instrument
Historical performance is a great place to start when researching a stock so above you can see the gauge for Shinva Medical Instrument's ROCE against it's prior returns. If you'd like to look at how Shinva Medical Instrument has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
The trends we've noticed at Shinva Medical Instrument are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 11%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 28%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
Another thing to note, Shinva Medical Instrument has a high ratio of current liabilities to total assets of 53%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
Our Take On Shinva Medical Instrument's ROCE
To sum it up, Shinva Medical Instrument has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 117% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
Shinva Medical Instrument does have some risks though, and we've spotted 1 warning sign for Shinva Medical Instrument that you might be interested in.
While Shinva Medical Instrument 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.