Some Investors May Be Worried About Yixintang Pharmaceutical Group's (SZSE:002727) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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 Yixintang Pharmaceutical Group (SZSE:002727) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Yixintang Pharmaceutical Group, this is the formula:

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

0.087 = CN¥848m ÷ (CN¥18b - CN¥7.8b) (Based on the trailing twelve months to March 2024).

So, Yixintang Pharmaceutical Group has an ROCE of 8.7%. On its own that's a low return, but compared to the average of 6.4% generated by the Consumer Retailing industry, it's much better.

See our latest analysis for Yixintang Pharmaceutical Group

In the above chart we have measured Yixintang Pharmaceutical Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Yixintang Pharmaceutical Group .

What Does the ROCE Trend For Yixintang Pharmaceutical Group Tell Us?

Unfortunately, the trend isn't great with ROCE falling from 19% five years ago, while capital employed has grown 140%. 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. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Yixintang Pharmaceutical Group might not have received a full period of earnings contribution from it.

Another thing to note, Yixintang Pharmaceutical Group has a high ratio of current liabilities to total assets of 44%. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Yixintang Pharmaceutical Group's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 42% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a separate note, we've found 2 warning signs for Yixintang Pharmaceutical Group you'll probably want to know about.

While Yixintang Pharmaceutical Group 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.

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