Returns On Capital At Beijing Chunlizhengda Medical Instruments (HKG:1858) Paint A Concerning Picture

Stock Analysis

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. In light of that, when we looked at Beijing Chunlizhengda Medical Instruments (HKG:1858) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Beijing Chunlizhengda Medical Instruments is:

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

0.089 = CN¥254m ÷ (CN¥3.4b - CN¥523m) (Based on the trailing twelve months to March 2023).

Therefore, Beijing Chunlizhengda Medical Instruments has an ROCE of 8.9%. On its own, that's a low figure but it's around the 9.8% average generated by the Medical Equipment industry.

View our latest analysis for Beijing Chunlizhengda Medical Instruments

Above you can see how the current ROCE for Beijing Chunlizhengda Medical Instruments compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

On the surface, the trend of ROCE at Beijing Chunlizhengda Medical Instruments doesn't inspire confidence. To be more specific, ROCE has fallen from 14% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

Bringing it all together, while we're somewhat encouraged by Beijing Chunlizhengda Medical Instruments' reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 175% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing, we've spotted 1 warning sign facing Beijing Chunlizhengda Medical Instruments that you might find interesting.

While Beijing Chunlizhengda Medical Instruments isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Find out whether Beijing Chunlizhengda Medical Instruments is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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Beijing Chunlizhengda Medical Instruments Co., Ltd., an orthopedic medical device company, engages in the research and development, production, and trading of surgical implants, instruments, and related products in the People’s Republic of China.

Flawless balance sheet and undervalued.