What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 investigating Contec Medical SystemsLtd (SZSE:300869), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Contec Medical SystemsLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.074 = CN¥206m ÷ (CN¥3.5b - CN¥692m) (Based on the trailing twelve months to September 2023).
Therefore, Contec Medical SystemsLtd has an ROCE of 7.4%. Even though it's in line with the industry average of 7.4%, it's still a low return by itself.
See our latest analysis for Contec Medical SystemsLtd
Historical performance is a great place to start when researching a stock so above you can see the gauge for Contec Medical SystemsLtd's ROCE against it's prior returns. If you'd like to look at how Contec Medical SystemsLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Contec Medical SystemsLtd Tell Us?
On the surface, the trend of ROCE at Contec Medical SystemsLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 9.8% over the last five years. 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.
Our Take On Contec Medical SystemsLtd's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Contec Medical SystemsLtd is reinvesting for growth and has higher sales as a result. Despite these promising trends, the stock has collapsed 84% over the last three years, so there could be other factors hurting the company's prospects. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.
One more thing to note, we've identified 2 warning signs with Contec Medical SystemsLtd and understanding them should be part of your investment process.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.