Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. With that in mind, we've noticed some promising trends at Jiangsu Yuyue Medical Equipment & Supply (SZSE:002223) so let's look a bit deeper.

What Is 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 Jiangsu Yuyue Medical Equipment & Supply:

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

0.17 = CN¥2.2b ÷ (CN¥16b - CN¥2.7b) (Based on the trailing twelve months to September 2023).

Thus, Jiangsu Yuyue Medical Equipment & Supply has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Medical Equipment industry average of 7.7% it's much better.

See our latest analysis for Jiangsu Yuyue Medical Equipment & Supply

In the above chart we have measured Jiangsu Yuyue Medical Equipment & Supply's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Jiangsu Yuyue Medical Equipment & Supply here for free.

What Can We Tell From Jiangsu Yuyue Medical Equipment & Supply's ROCE Trend?

Investors would be pleased with what's happening at Jiangsu Yuyue Medical Equipment & Supply. Over the last five years, returns on capital employed have risen substantially to 17%. Basically the business is earning more per dollar of capital invested and in addition to that, 130% more capital is being employed now too. So we're very much inspired by what we're seeing at Jiangsu Yuyue Medical Equipment & Supply thanks to its ability to profitably reinvest capital.

In Conclusion...

To sum it up, Jiangsu Yuyue Medical Equipment & Supply has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 81% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Jiangsu Yuyue Medical Equipment & Supply can keep these trends up, it could have a bright future ahead.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Jiangsu Yuyue Medical Equipment & Supply (of which 1 is a bit concerning!) that you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.