C.Q. Pharmaceutical Holding's (SZSE:000950) Returns On Capital Not Reflecting Well On The Business

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. 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 C.Q. Pharmaceutical Holding (SZSE:000950), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its 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).

So, 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 9.1%.

View 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?

On the surface, the trend of ROCE at C.Q. Pharmaceutical Holding doesn't inspire confidence. Over the last five years, returns on capital have decreased to 7.1% from 11% five years ago. 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.

On a separate but related note, it's important to know that C.Q. Pharmaceutical Holding has a current liabilities to total assets ratio of 67%, which we'd consider pretty high. 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.

What We Can Learn From 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, the stock has only gained 12% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with C.Q. Pharmaceutical Holding (including 1 which is potentially serious) .

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.