If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Shanghai United Imaging Healthcare (SHSE:688271) and its trend of ROCE, we really liked what we saw.
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 Shanghai United Imaging Healthcare:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.08 = CN¥1.5b ÷ (CN¥24b - CN¥5.6b) (Based on the trailing twelve months to September 2023).
Therefore, Shanghai United Imaging Healthcare has an ROCE of 8.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.0%.
View our latest analysis for Shanghai United Imaging Healthcare
In the above chart we have measured Shanghai United Imaging Healthcare'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 Shanghai United Imaging Healthcare here for free.
What The Trend Of ROCE Can Tell Us
Shanghai United Imaging Healthcare has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses four years ago, but now it's earning 8.0% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Shanghai United Imaging Healthcare is utilizing 394% more capital than it was four years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
One more thing to note, Shanghai United Imaging Healthcare has decreased current liabilities to 23% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.
The Bottom Line
Long story short, we're delighted to see that Shanghai United Imaging Healthcare's reinvestment activities have paid off and the company is now profitable. Astute investors may have an opportunity here because the stock has declined 25% in the last year. So researching this company further and determining whether or not these trends will continue seems justified.
One more thing, we've spotted 1 warning sign facing Shanghai United Imaging Healthcare that you might find interesting.
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.
