Returns On Capital At Sichuan Hezong Medicine Easy-to-buy Pharmaceutical (SZSE:300937) Paint A Concerning Picture

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 Sichuan Hezong Medicine Easy-to-buy Pharmaceutical (SZSE:300937) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Sichuan Hezong Medicine Easy-to-buy Pharmaceutical is:

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

0.049 = CN¥44m ÷ (CN¥1.9b - CN¥1.0b) (Based on the trailing twelve months to March 2024).

Therefore, Sichuan Hezong Medicine Easy-to-buy Pharmaceutical has an ROCE of 4.9%. Ultimately, that's a low return and it under-performs the Consumer Retailing industry average of 6.4%.

Check out our latest analysis for Sichuan Hezong Medicine Easy-to-buy Pharmaceutical

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sichuan Hezong Medicine Easy-to-buy Pharmaceutical's ROCE against it's prior returns. If you're interested in investigating Sichuan Hezong Medicine Easy-to-buy Pharmaceutical's past further, check out this free graph covering Sichuan Hezong Medicine Easy-to-buy Pharmaceutical's past earnings, revenue and cash flow.

What Does the ROCE Trend For Sichuan Hezong Medicine Easy-to-buy Pharmaceutical Tell Us?

When we looked at the ROCE trend at Sichuan Hezong Medicine Easy-to-buy Pharmaceutical, we didn't gain much confidence. To be more specific, ROCE has fallen from 16% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 54%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Bottom Line On Sichuan Hezong Medicine Easy-to-buy Pharmaceutical's ROCE

In summary, Sichuan Hezong Medicine Easy-to-buy Pharmaceutical is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 62% over the last three years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Sichuan Hezong Medicine Easy-to-buy Pharmaceutical has the makings of a multi-bagger.

On a final note, we've found 3 warning signs for Sichuan Hezong Medicine Easy-to-buy Pharmaceutical that we think you should be aware of.

While Sichuan Hezong Medicine Easy-to-buy Pharmaceutical may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.