Some Investors May Be Worried About Sichuan Hezong Medicine Easy-to-buy Pharmaceutical's (SZSE:300937) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Sichuan Hezong Medicine Easy-to-buy Pharmaceutical (SZSE:300937) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Sichuan Hezong Medicine Easy-to-buy Pharmaceutical, this is the formula:

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

0.027 = CN¥24m ÷ (CN¥1.7b - CN¥816m) (Based on the trailing twelve months to September 2024).

So, Sichuan Hezong Medicine Easy-to-buy Pharmaceutical has an ROCE of 2.7%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 6.0%.

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

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Sichuan Hezong Medicine Easy-to-buy Pharmaceutical has performed in the past in other metrics, you can view this free graph of 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?

On the surface, the trend of ROCE at Sichuan Hezong Medicine Easy-to-buy Pharmaceutical doesn't inspire confidence. To be more specific, ROCE has fallen from 16% over the last five years. However it looks like Sichuan Hezong Medicine Easy-to-buy Pharmaceutical might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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 48%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

In Conclusion...

To conclude, we've found that Sichuan Hezong Medicine Easy-to-buy Pharmaceutical is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 20% in the last three years. 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.

Sichuan Hezong Medicine Easy-to-buy Pharmaceutical does come with some risks though, we found 5 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

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.

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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.