Hangzhou Alltest Biotech (SHSE:688606) May Have Issues Allocating Its Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. However, after investigating Hangzhou Alltest Biotech (SHSE:688606), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Hangzhou Alltest Biotech, this is the formula:

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

0.047 = CN¥185m ÷ (CN¥4.2b - CN¥274m) (Based on the trailing twelve months to September 2024).

Therefore, Hangzhou Alltest Biotech has an ROCE of 4.7%. In absolute terms, that's a low return but it's around the Medical Equipment industry average of 5.9%.

Check out our latest analysis for Hangzhou Alltest Biotech

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

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Hangzhou Alltest Biotech, we didn't gain much confidence. To be more specific, ROCE has fallen from 27% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line On Hangzhou Alltest Biotech's ROCE

In summary, we're somewhat concerned by Hangzhou Alltest Biotech's diminishing returns on increasing amounts of capital. Investors must expect better things on the horizon though because the stock has risen 8.0% in the last three years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Hangzhou Alltest Biotech (including 2 which are potentially serious) .

While Hangzhou Alltest Biotech 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.