What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 on that note, Whole Shine Medical Technology (SZSE:002622) looks quite promising in regards to its trends of return on capital.

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 Whole Shine Medical Technology:

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

0.12 = CN¥78m ÷ (CN¥1.6b - CN¥893m) (Based on the trailing twelve months to September 2024).

Thus, Whole Shine Medical Technology has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 9.0% generated by the Healthcare industry.

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're interested in investigating Whole Shine Medical Technology's past further, check out this free graph covering Whole Shine Medical Technology's past earnings, revenue and cash flow.

So How Is Whole Shine Medical Technology's ROCE Trending?

Like most people, we're pleased that Whole Shine Medical Technology is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 12% which is no doubt a relief for some early shareholders. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 51%. This could potentially mean that the company is selling some of its assets.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 57% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

In Conclusion...

In the end, Whole Shine Medical Technology has proven it's capital allocation skills are good with those higher returns from less amount of capital. Since the stock has only returned 3.3% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

On a final note, we found 2 warning signs for Whole Shine Medical Technology (1 makes us a bit uncomfortable) you should be aware of.

While Whole Shine Medical Technology 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.