There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Guangzhou Wondfo BiotechLtd (SZSE:300482), we don't think it's current trends fit the mold of a multi-bagger.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Guangzhou Wondfo BiotechLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.058 = CN¥315m ÷ (CN¥5.8b - CN¥458m) (Based on the trailing twelve months to June 2023).
So, Guangzhou Wondfo BiotechLtd has an ROCE of 5.8%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 9.6%.
See our latest analysis for Guangzhou Wondfo BiotechLtd
Above you can see how the current ROCE for Guangzhou Wondfo BiotechLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Guangzhou Wondfo BiotechLtd here for free.
How Are Returns Trending?
The trend of ROCE doesn't look fantastic because it's fallen from 15% five years ago, while the business's capital employed increased by 149%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. Guangzhou Wondfo BiotechLtd probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.
The Bottom Line
We're a bit apprehensive about Guangzhou Wondfo BiotechLtd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors must expect better things on the horizon though because the stock has risen 24% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.
Guangzhou Wondfo BiotechLtd does have some risks though, and we've spotted 2 warning signs for Guangzhou Wondfo BiotechLtd that you might be interested in.
While Guangzhou Wondfo BiotechLtd 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.