What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Huadong Medicine (SZSE:000963), it didn't seem to tick all of these boxes.
Understanding 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. To calculate this metric for Huadong Medicine, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = CN¥3.5b ÷ (CN¥34b - CN¥12b) (Based on the trailing twelve months to September 2023).
Thus, Huadong Medicine has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Healthcare industry average of 11% it's much better.
Check out our latest analysis for Huadong Medicine
Above you can see how the current ROCE for Huadong Medicine compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Huadong Medicine.
How Are Returns Trending?
In terms of Huadong Medicine's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 25%, but since then they've fallen to 16%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
The Bottom Line On Huadong Medicine's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Huadong Medicine. And the stock has followed suit returning a meaningful 66% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.
On a separate note, we've found 1 warning sign for Huadong Medicine you'll probably want to know about.
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.