If you're not sure where to start in your search for the next multi-bagger, there are a few key trends to look out for. First, you'll want a proven growing return on invested capital (ROCE), followed by a growth in invested capital. Essentially this means that a company has profitable endeavors that it can continually reinvest in, which is the hallmark of a multi-bagger. In that regard, Holeshine Medical Technology (SZSE:002622) looks very promising in terms of its return on invested capital trends.
What is Return on Invested Capital (ROCE)?
For those unfamiliar, ROCE is the ratio of a company's annual pre-tax profit (revenue) to the capital employed in the business: The formula for calculating this metric for Whole Shine Medical Technology is:
Return on Invested Capital = Earnings Before Interest and Taxes (EBIT) ÷ (Total Assets – Current Liabilities)
0.11 = CNY67m ÷ (CNY1.5bn – CNY894m) (Based on the trailing twelve months to March 2024).
So Whole Shine Medical Technology has an ROCE of 11%. In absolute terms, this is a fairly normal return and somewhat close to the Healthcare industry average of 9.6%.
View our latest analysis for Whole Shine Medical Technology
SZSE:002622 Return on equity August 26, 2024
The past is no reflection of the future, but it is useful to know how a company has performed in the past, which is why we have prepared the graph above. If you would like to see how Whole Shine Medical Technology has performed on other metrics in the past, you can see this graph of Whole Shine Medical Technology's historical earnings, revenue and cash flow for free.
So how is Whole Shine Medical Technology's ROCE trending?
Like many, I'm glad to see Whole Shine Medical Technology is making a pre-tax profit. The company was losing money five years ago but has now turned around and is making an 11% profit, which will no doubt come as a relief to early shareholders. Additionally, the company's capital utilisation is 56% lower than it was five years ago, which, taken at face value, means the company needs to deploy less capital to make a profit. With Whole Shine Medical Technology's improving ROCE, it's likely that it is selling off unprofitable assets.
As an aside, the improvement in ROCE appears to be partly driven by an increase in current liabilities. In real terms, this means that suppliers or short-term creditors are now funding 59% of the business, which is more than it was five years ago. This ratio is quite high, so investors should bear in mind that current liabilities at that level may pose some risk to any given business.
What we can learn from Whole Shine Medical Technology's ROCE
In summary, it's great to see that Holeshine Medical Technology has been able to turn things around and generate higher profits with less capital. Also, with the share price down 54% over the past five years, there may be an opportunity here. Therefore, it seems warranted to investigate this company further to determine if these trends will continue.
If you want to find out more about Whole Shine Medical Technology, we've spotted 2 warning signs, 1 of which should not be ignored.
While Whole Shine Medical Technology may not be earning the highest return on equity currently, we have compiled a list of companies currently earning a return on equity greater than 25%, and you can find this free list here.
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This article by Simply Wall St is of general nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology, and our articles are not intended as financial advice. It is not a recommendation to buy or sell a stock, and does not take into account your objectives or financial situation. We aim to provide long-term analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned herein.
