What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Having said that, from a first glance at Ningbo Tianyi Medical Appliance (SZSE:301097) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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 Ningbo Tianyi Medical Appliance:

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

0.012 = CN¥17m ÷ (CN¥1.8b - CN¥270m) (Based on the trailing twelve months to March 2024).

Thus, Ningbo Tianyi Medical Appliance has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 6.3%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ningbo Tianyi Medical Appliance's ROCE against it's prior returns. If you'd like to look at how Ningbo Tianyi Medical Appliance has performed in the past in other metrics, you can view this free graph of Ningbo Tianyi Medical Appliance's past earnings, revenue and cash flow.

So How Is Ningbo Tianyi Medical Appliance's ROCE Trending?

In terms of Ningbo Tianyi Medical Appliance's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 19%, but since then they've fallen to 1.2%. However it looks like Ningbo Tianyi Medical Appliance 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.

On a side note, Ningbo Tianyi Medical Appliance has done well to pay down its current liabilities to 15% of total assets. So we could link some of this to the decrease in ROCE. 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.

What We Can Learn From Ningbo Tianyi Medical Appliance's ROCE

Bringing it all together, while we're somewhat encouraged by Ningbo Tianyi Medical Appliance's reinvestment in its own business, we're aware that returns are shrinking. Additionally, the stock's total return to shareholders over the last year has been flat, which isn't too surprising. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Ningbo Tianyi Medical Appliance (of which 2 are potentially serious!) that you should know about.

While Ningbo Tianyi Medical Appliance 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.