What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. That's why when we briefly looked at Qingdao Baheal Medical's (SZSE:301015) ROCE trend, we were very happy with what we saw.

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. Analysts use this formula to calculate it for Qingdao Baheal Medical:

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

0.27 = CN¥938m ÷ (CN¥5.3b - CN¥1.8b) (Based on the trailing twelve months to December 2023).

So, Qingdao Baheal Medical has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Healthcare industry average of 9.5%.

Above you can see how the current ROCE for Qingdao Baheal Medical compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Qingdao Baheal Medical for free.

What The Trend Of ROCE Can Tell Us

We'd be pretty happy with returns on capital like Qingdao Baheal Medical. Over the past five years, ROCE has remained relatively flat at around 27% and the business has deployed 219% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Qingdao Baheal Medical can keep this up, we'd be very optimistic about its future.

On a side note, Qingdao Baheal Medical has done well to reduce current liabilities to 34% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

What We Can Learn From Qingdao Baheal Medical's ROCE

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. However, over the last three years, the stock hasn't provided much growth to shareholders in the way of total returns. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

Qingdao Baheal Medical does have some risks though, and we've spotted 1 warning sign for Qingdao Baheal Medical that you might be interested in.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.