If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at LEPU ScienTech Medical Technology (Shanghai) (HKG:2291) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for LEPU ScienTech Medical Technology (Shanghai):

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

0.064 = CN¥118m ÷ (CN¥1.9b - CN¥54m) (Based on the trailing twelve months to June 2023).

Therefore, LEPU ScienTech Medical Technology (Shanghai) has an ROCE of 6.4%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 9.9%.

View our latest analysis for LEPU ScienTech Medical Technology (Shanghai)

Historical performance is a great place to start when researching a stock so above you can see the gauge for LEPU ScienTech Medical Technology (Shanghai)'s ROCE against it's prior returns. If you're interested in investigating LEPU ScienTech Medical Technology (Shanghai)'s past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at LEPU ScienTech Medical Technology (Shanghai) doesn't inspire confidence. To be more specific, ROCE has fallen from 27% over the last three years. 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 related note, LEPU ScienTech Medical Technology (Shanghai) has decreased its current liabilities to 2.8% of total assets. So we could link some of this to the decrease in ROCE. 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.

Our Take On LEPU ScienTech Medical Technology (Shanghai)'s ROCE

In summary, despite lower returns in the short term, we're encouraged to see that LEPU ScienTech Medical Technology (Shanghai) is reinvesting for growth and has higher sales as a result. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you'd like to know more about LEPU ScienTech Medical Technology (Shanghai), we've spotted 3 warning signs, and 1 of them is concerning.

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.