Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think LEPU ScienTech Medical Technology (Shanghai) (HKG:2291) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on LEPU ScienTech Medical Technology (Shanghai) is:

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

0.085 = CN¥165m ÷ (CN¥2.0b - CN¥59m) (Based on the trailing twelve months to December 2023).

Thus, LEPU ScienTech Medical Technology (Shanghai) has an ROCE of 8.5%. In absolute terms, that's a low return but it's around the Medical Equipment industry average of 8.4%.

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how LEPU ScienTech Medical Technology (Shanghai) has performed in the past in other metrics, you can view this free graph of LEPU ScienTech Medical Technology (Shanghai)'s past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at LEPU ScienTech Medical Technology (Shanghai), we didn't gain much confidence. Over the last four years, returns on capital have decreased to 8.5% from 25% four 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, LEPU ScienTech Medical Technology (Shanghai) has done well to pay down its current liabilities to 3.0% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On LEPU ScienTech Medical Technology (Shanghai)'s ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for LEPU ScienTech Medical Technology (Shanghai). And there could be an opportunity here if other metrics look good too, because the stock has declined 32% in the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

LEPU ScienTech Medical Technology (Shanghai) could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 2291 on our platform quite valuable.

While LEPU ScienTech Medical Technology (Shanghai) 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.

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