ChongQing Zhengchuan Pharmaceutical PackagingLtd (SHSE:603976) Will Be Hoping To Turn Its Returns On Capital Around

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at ChongQing Zhengchuan Pharmaceutical PackagingLtd (SHSE:603976) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on ChongQing Zhengchuan Pharmaceutical PackagingLtd is:

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

0.038 = CN¥64m ÷ (CN¥2.0b - CN¥329m) (Based on the trailing twelve months to June 2024).

Therefore, ChongQing Zhengchuan Pharmaceutical PackagingLtd has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 5.8%.

View our latest analysis for ChongQing Zhengchuan Pharmaceutical PackagingLtd

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

So How Is ChongQing Zhengchuan Pharmaceutical PackagingLtd's ROCE Trending?

When we looked at the ROCE trend at ChongQing Zhengchuan Pharmaceutical PackagingLtd, we didn't gain much confidence. Around five years ago the returns on capital were 6.3%, but since then they've fallen to 3.8%. 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.

In Conclusion...

To conclude, we've found that ChongQing Zhengchuan Pharmaceutical PackagingLtd 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 12% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a final note, we found 2 warning signs for ChongQing Zhengchuan Pharmaceutical PackagingLtd (1 can't be ignored) you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.