If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Guangdong Biolight Meditech (SZSE:300246), it didn't seem to tick all of these boxes.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Guangdong Biolight Meditech:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.021 = CN¥38m ÷ (CN¥2.6b - CN¥752m) (Based on the trailing twelve months to March 2024).
So, Guangdong Biolight Meditech has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 7.0%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Guangdong Biolight Meditech's ROCE against it's prior returns. If you'd like to look at how Guangdong Biolight Meditech has performed in the past in other metrics, you can view this free graph of Guangdong Biolight Meditech's past earnings, revenue and cash flow.
So How Is Guangdong Biolight Meditech's ROCE Trending?
On the surface, the trend of ROCE at Guangdong Biolight Meditech doesn't inspire confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 2.1%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.
In Conclusion...
To conclude, we've found that Guangdong Biolight Meditech is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 2.4% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
Guangdong Biolight Meditech does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit concerning...
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.