If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. So on that note, Shanghai United Imaging Healthcare (SHSE:688271) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Shanghai United Imaging Healthcare is:

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

0.084 = CN¥1.7b ÷ (CN¥25b - CN¥5.4b) (Based on the trailing twelve months to March 2024).

Therefore, Shanghai United Imaging Healthcare has an ROCE of 8.4%. In absolute terms, that's a low return, but it's much better than the Medical Equipment industry average of 6.4%.

Above you can see how the current ROCE for Shanghai United Imaging Healthcare compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Shanghai United Imaging Healthcare .

What Can We Tell From Shanghai United Imaging Healthcare's ROCE Trend?

The fact that Shanghai United Imaging Healthcare is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 8.4% on its capital. And unsurprisingly, like most companies trying to break into the black, Shanghai United Imaging Healthcare is utilizing 438% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a related note, the company's ratio of current liabilities to total assets has decreased to 21%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Shanghai United Imaging Healthcare has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

In Conclusion...

In summary, it's great to see that Shanghai United Imaging Healthcare has managed to break into profitability and is continuing to reinvest in its business. Given the stock has declined 14% in the last year, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you'd like to know about the risks facing Shanghai United Imaging Healthcare, we've discovered 1 warning sign that you should be aware of.

While Shanghai United Imaging Healthcare 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.