There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Beijing Wandong Medical TechnologyLtd (SHSE:600055), we don't think it's current trends fit the mold of a multi-bagger.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Beijing Wandong Medical TechnologyLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.016 = CN¥79m ÷ (CN¥5.4b - CN¥526m) (Based on the trailing twelve months to December 2023).
Thus, Beijing Wandong Medical TechnologyLtd has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 7.7%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Beijing Wandong Medical TechnologyLtd's ROCE against it's prior returns. If you're interested in investigating Beijing Wandong Medical TechnologyLtd's past further, check out this free graph covering Beijing Wandong Medical TechnologyLtd's past earnings, revenue and cash flow.
How Are Returns Trending?
When we looked at the ROCE trend at Beijing Wandong Medical TechnologyLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.6% from 6.6% five years ago. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
What We Can Learn From Beijing Wandong Medical TechnologyLtd's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Beijing Wandong Medical TechnologyLtd. These trends are starting to be recognized by investors since the stock has delivered a 27% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.
One more thing to note, we've identified 2 warning signs with Beijing Wandong Medical TechnologyLtd and understanding these should be part of your investment process.
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.