Investors Could Be Concerned With HPGC Renmintongtai Pharmaceutical's (SHSE:600829) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at HPGC Renmintongtai Pharmaceutical (SHSE:600829), it didn't seem to tick all of these boxes.

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 HPGC Renmintongtai Pharmaceutical is:

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

0.12 = CN¥357m ÷ (CN¥7.0b - CN¥4.0b) (Based on the trailing twelve months to September 2024).

Thus, HPGC Renmintongtai Pharmaceutical has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 9.0% generated by the Healthcare industry.

Check out our latest analysis for HPGC Renmintongtai 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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of HPGC Renmintongtai Pharmaceutical.

How Are Returns Trending?

When we looked at the ROCE trend at HPGC Renmintongtai Pharmaceutical, we didn't gain much confidence. Around five years ago the returns on capital were 20%, but since then they've fallen to 12%. 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 may take some time before the company starts to see any change in earnings from these investments.

Another thing to note, HPGC Renmintongtai Pharmaceutical has a high ratio of current liabilities to total assets of 57%. 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.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by HPGC Renmintongtai Pharmaceutical's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 0.003% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

If you want to continue researching HPGC Renmintongtai Pharmaceutical, you might be interested to know about the 1 warning sign that our analysis has discovered.

While HPGC Renmintongtai 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.