If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 Kangji Medical Holdings (HKG:9997), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

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. Analysts use this formula to calculate it for Kangji Medical Holdings:

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

0.21 = CN¥491m ÷ (CN¥4.4b - CN¥2.0b) (Based on the trailing twelve months to June 2024).

Thus, Kangji Medical Holdings has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Medical Equipment industry average of 8.5%.

Above you can see how the current ROCE for Kangji Medical Holdings 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 Kangji Medical Holdings .

What Can We Tell From Kangji Medical Holdings' ROCE Trend?

When we looked at the ROCE trend at Kangji Medical Holdings, we didn't gain much confidence. While it's comforting that the ROCE is high, five years ago it was 56%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Kangji Medical Holdings' current liabilities have increased over the last five years to 45% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 21%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Kangji Medical Holdings is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 22% in the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a separate note, we've found 1 warning sign for Kangji Medical Holdings you'll probably want to know about.

Kangji Medical Holdings is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.