There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Zhejiang Gongdong Medical Technology (SHSE:605369) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Zhejiang Gongdong Medical Technology is:

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

0.057 = CN¥93m ÷ (CN¥1.9b - CN¥241m) (Based on the trailing twelve months to September 2023).

Thus, Zhejiang Gongdong Medical Technology has an ROCE of 5.7%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 8.1%.

Above you can see how the current ROCE for Zhejiang Gongdong Medical Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Zhejiang Gongdong Medical Technology .

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Zhejiang Gongdong Medical Technology, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.7% from 27% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Zhejiang Gongdong Medical Technology has done well to pay down its current liabilities to 13% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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 Bottom Line On Zhejiang Gongdong Medical Technology's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Zhejiang Gongdong Medical Technology have fallen, meanwhile the business is employing more capital than it was five years ago. In spite of that, the stock has delivered a 4.7% return to shareholders who held over the last three years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One more thing, we've spotted 2 warning signs facing Zhejiang Gongdong Medical Technology that you might find interesting.

While Zhejiang Gongdong Medical Technology isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.