What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Guangzhou Baiyunshan Pharmaceutical Holdings (HKG:874) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
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 Baiyunshan Pharmaceutical Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.096 = CN¥4.0b ÷ (CN¥74b - CN¥33b) (Based on the trailing twelve months to September 2023).
Therefore, Guangzhou Baiyunshan Pharmaceutical Holdings has an ROCE of 9.6%. On its own, that's a low figure but it's around the 11% average generated by the Healthcare industry.
View our latest analysis for Guangzhou Baiyunshan Pharmaceutical Holdings
In the above chart we have measured Guangzhou Baiyunshan Pharmaceutical Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
The returns on capital haven't changed much for Guangzhou Baiyunshan Pharmaceutical Holdings in recent years. Over the past five years, ROCE has remained relatively flat at around 9.6% and the business has deployed 67% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
On a side note, Guangzhou Baiyunshan Pharmaceutical Holdings' current liabilities are still rather high at 44% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
Our Take On Guangzhou Baiyunshan Pharmaceutical Holdings' ROCE
In conclusion, Guangzhou Baiyunshan Pharmaceutical Holdings has been investing more capital into the business, but returns on that capital haven't increased. And investors appear hesitant that the trends will pick up because the stock has fallen 12% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
Guangzhou Baiyunshan Pharmaceutical Holdings does have some risks though, and we've spotted 1 warning sign for Guangzhou Baiyunshan Pharmaceutical Holdings that you might be interested in.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.