There Are Reasons To Feel Uneasy About Huadong Medicine's (SZSE:000963) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 Huadong Medicine (SZSE:000963), we don't think it's current trends fit the mold of a multi-bagger.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Huadong Medicine, this is the formula:

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

0.15 = CN¥3.6b ÷ (CN¥34b - CN¥11b) (Based on the trailing twelve months to March 2024).

Therefore, Huadong Medicine has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 9.5% generated by the Healthcare industry.

See our latest analysis for Huadong Medicine

Above you can see how the current ROCE for Huadong Medicine compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Huadong Medicine .

What Does the ROCE Trend For Huadong Medicine Tell Us?

When we looked at the ROCE trend at Huadong Medicine, we didn't gain much confidence. Around five years ago the returns on capital were 25%, but since then they've fallen to 15%. 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.

The Bottom Line

To conclude, we've found that Huadong Medicine is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 40% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Like most companies, Huadong Medicine does come with some risks, and we've found 1 warning sign that you should be aware of.

While Huadong Medicine 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.