Chalkis Health Industry (SZSE:000972) Might Have The Makings Of A Multi-Bagger

What are the early trends we should look for to identify a stock that could 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Chalkis Health Industry (SZSE:000972) so let's look a bit deeper.

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

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 Chalkis Health Industry is:

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

0.18 = CN¥54m ÷ (CN¥1.1b - CN¥804m) (Based on the trailing twelve months to March 2024).

Therefore, Chalkis Health Industry has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 7.6% generated by the Food industry.

Check out our latest analysis for Chalkis Health Industry

Historical performance is a great place to start when researching a stock so above you can see the gauge for Chalkis Health Industry's ROCE against it's prior returns. If you'd like to look at how Chalkis Health Industry has performed in the past in other metrics, you can view this free graph of Chalkis Health Industry's past earnings, revenue and cash flow.

The Trend Of ROCE

Like most people, we're pleased that Chalkis Health Industry is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 18% which is no doubt a relief for some early shareholders. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 32%. This could potentially mean that the company is selling some of its assets.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 72% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

Our Take On Chalkis Health Industry's ROCE

In a nutshell, we're pleased to see that Chalkis Health Industry has been able to generate higher returns from less capital. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you want to know some of the risks facing Chalkis Health Industry we've found 2 warning signs (1 is potentially serious!) that you should be aware of before investing here.

While Chalkis Health Industry 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.