Returns On Capital At Guangzhou Wondfo BiotechLtd (SZSE:300482) Paint A Concerning Picture

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Guangzhou Wondfo BiotechLtd (SZSE:300482) 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?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Guangzhou Wondfo BiotechLtd:

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

0.081 = CN¥508m ÷ (CN¥6.8b - CN¥505m) (Based on the trailing twelve months to September 2024).

Thus, Guangzhou Wondfo BiotechLtd has an ROCE of 8.1%. On its own that's a low return, but compared to the average of 5.9% generated by the Medical Equipment industry, it's much better.

See our latest analysis for Guangzhou Wondfo BiotechLtd

In the above chart we have measured Guangzhou Wondfo BiotechLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Guangzhou Wondfo BiotechLtd .

What Does the ROCE Trend For Guangzhou Wondfo BiotechLtd Tell Us?

Unfortunately, the trend isn't great with ROCE falling from 20% five years ago, while capital employed has grown 161%. That being said, Guangzhou Wondfo BiotechLtd raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Guangzhou Wondfo BiotechLtd might not have received a full period of earnings contribution from it.

The Key Takeaway

To conclude, we've found that Guangzhou Wondfo BiotechLtd is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 29% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One more thing to note, we've identified 2 warning signs with Guangzhou Wondfo BiotechLtd and understanding them should be part of your investment process.

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.