What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Having said that, from a first glance at Shanghai Aohua Photoelectricity Endoscope (SHSE:688212) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on Shanghai Aohua Photoelectricity Endoscope is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.02 = CN¥30m ÷ (CN¥1.6b - CN¥107m) (Based on the trailing twelve months to March 2024).
Thus, Shanghai Aohua Photoelectricity Endoscope has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 6.3%.
Above you can see how the current ROCE for Shanghai Aohua Photoelectricity Endoscope compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Shanghai Aohua Photoelectricity Endoscope .
The Trend Of ROCE
In terms of Shanghai Aohua Photoelectricity Endoscope's historical ROCE trend, it doesn't exactly demand attention. The company has employed 216% more capital in the last five years, and the returns on that capital have remained stable at 2.0%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
In Conclusion...
As we've seen above, Shanghai Aohua Photoelectricity Endoscope's returns on capital haven't increased but it is reinvesting in the business. And in the last year, the stock has given away 21% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
One more thing, we've spotted 1 warning sign facing Shanghai Aohua Photoelectricity Endoscope that you might find interesting.
While Shanghai Aohua Photoelectricity Endoscope 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.