Be Wary Of Meihua International Medical Technologies (NASDAQ:MHUA) And Its Returns On Capital
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Meihua International Medical Technologies (NASDAQ:MHUA) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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. The formula for this calculation on Meihua International Medical Technologies is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.097 = US$14m ÷ (US$163m - US$23m) (Based on the trailing twelve months to June 2023).
Therefore, Meihua International Medical Technologies has an ROCE of 9.7%. On its own, that's a low figure but it's around the 9.3% average generated by the Medical Equipment industry.
View our latest analysis for Meihua International Medical Technologies
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 want to delve into the historical earnings, revenue and cash flow of Meihua International Medical Technologies, check out these free graphs here.
The Trend Of ROCE
On the surface, the trend of ROCE at Meihua International Medical Technologies doesn't inspire confidence. To be more specific, ROCE has fallen from 37% over the last four years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
The Bottom Line
We're a bit apprehensive about Meihua International Medical Technologies because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Unsurprisingly then, the stock has dived 93% over the last year, so investors are recognizing these changes and don't like the company's prospects. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
Meihua International Medical Technologies does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are a bit concerning...
While Meihua International Medical Technologies may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
