C.Q. Pharmaceutical Holding (SZSE:000950) Is Reinvesting At Lower Rates Of Return

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 C.Q. Pharmaceutical Holding (SZSE:000950), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for C.Q. Pharmaceutical Holding:

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

0.071 = CN¥1.5b ÷ (CN¥67b - CN¥45b) (Based on the trailing twelve months to September 2024).

Therefore, C.Q. Pharmaceutical Holding has an ROCE of 7.1%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 9.0%.

Check out our latest analysis for C.Q. Pharmaceutical Holding

In the above chart we have measured C.Q. Pharmaceutical Holding'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 C.Q. Pharmaceutical Holding for free.

What Does the ROCE Trend For C.Q. Pharmaceutical Holding Tell Us?

When we looked at the ROCE trend at C.Q. Pharmaceutical Holding, we didn't gain much confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 7.1%. 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, C.Q. Pharmaceutical Holding's current liabilities are still rather high at 67% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On C.Q. Pharmaceutical Holding's ROCE

Bringing it all together, while we're somewhat encouraged by C.Q. Pharmaceutical Holding's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly then, the total return to shareholders over the last five years has been flat. 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.

If you'd like to know more about C.Q. Pharmaceutical Holding, we've spotted 3 warning signs, and 1 of them is a bit unpleasant.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.