What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Intco Medical Technology (SZSE:300677), we don't think it's current trends fit the mold of a multi-bagger.
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 Intco Medical Technology:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0059 = CN¥109m ÷ (CN¥29b - CN¥11b) (Based on the trailing twelve months to March 2024).
So, Intco Medical Technology has an ROCE of 0.6%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 6.4%.
Above you can see how the current ROCE for Intco 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, you can check out the forecasts from the analysts covering Intco Medical Technology for free.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Intco Medical Technology doesn't inspire confidence. Over the last five years, returns on capital have decreased to 0.6% from 14% 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. If these investments prove successful, this can bode very well for long term stock performance.
The Bottom Line
While returns have fallen for Intco Medical Technology in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 354% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.
If you want to continue researching Intco Medical Technology, you might be interested to know about the 1 warning sign that our analysis has discovered.
While Intco 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.