Investors Could Be Concerned With DaShenLin Pharmaceutical Group's (SHSE:603233) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. However, after investigating DaShenLin Pharmaceutical Group (SHSE:603233), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for DaShenLin Pharmaceutical Group, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.16 = CN¥1.9b ÷ (CN¥21b - CN¥9.2b) (Based on the trailing twelve months to September 2023).

Therefore, DaShenLin Pharmaceutical Group has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 6.7% generated by the Consumer Retailing industry.

View our latest analysis for DaShenLin Pharmaceutical Group

Above you can see how the current ROCE for DaShenLin Pharmaceutical Group 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 DaShenLin Pharmaceutical Group for free.

What Can We Tell From DaShenLin Pharmaceutical Group's ROCE Trend?

The trend of ROCE doesn't look fantastic because it's fallen from 23% five years ago, while the business's capital employed increased by 305%. That being said, DaShenLin Pharmaceutical Group raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence DaShenLin Pharmaceutical Group might not have received a full period of earnings contribution from it.

On a side note, DaShenLin Pharmaceutical Group's current liabilities are still rather high at 43% 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.

What We Can Learn From DaShenLin Pharmaceutical Group's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that DaShenLin Pharmaceutical Group is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 38% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

If you'd like to know about the risks facing DaShenLin Pharmaceutical Group, we've discovered 1 warning sign that you should be aware of.

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.