Return Trends At ChenGuang Biotech Group (SZSE:300138) Aren't Appealing

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating ChenGuang Biotech Group (SZSE:300138), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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 ChenGuang Biotech Group, this is the formula:

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

0.097 = CN¥462m ÷ (CN¥9.1b - CN¥4.3b) (Based on the trailing twelve months to March 2024).

Therefore, ChenGuang Biotech Group has an ROCE of 9.7%. In absolute terms, that's a low return, but it's much better than the Food industry average of 7.9%.

View our latest analysis for ChenGuang Biotech Group

In the above chart we have measured ChenGuang Biotech Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering ChenGuang Biotech Group for free.

What The Trend Of ROCE Can Tell Us

The returns on capital haven't changed much for ChenGuang Biotech Group in recent years. The company has consistently earned 9.7% for the last five years, and the capital employed within the business has risen 161% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a separate but related note, it's important to know that ChenGuang Biotech Group has a current liabilities to total assets ratio of 47%, which we'd consider pretty high. 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.

Our Take On ChenGuang Biotech Group's ROCE

As we've seen above, ChenGuang Biotech Group's returns on capital haven't increased but it is reinvesting in the business. Since the stock has gained an impressive 44% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

ChenGuang Biotech Group does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

While ChenGuang Biotech Group 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.