There Are Reasons To Feel Uneasy About Guangzhou Wondfo BiotechLtd's (SZSE:300482) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Guangzhou Wondfo BiotechLtd (SZSE:300482), 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 Guangzhou Wondfo BiotechLtd:

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

0.068 = CN¥367m ÷ (CN¥5.8b - CN¥348m) (Based on the trailing twelve months to September 2023).

So, Guangzhou Wondfo BiotechLtd has an ROCE of 6.8%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 9.2%.

Check out 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, you can check out the forecasts from the analysts covering Guangzhou Wondfo BiotechLtd for free.

The Trend Of ROCE

On the surface, the trend of ROCE at Guangzhou Wondfo BiotechLtd doesn't inspire confidence. Around five years ago the returns on capital were 15%, but since then they've fallen to 6.8%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line On Guangzhou Wondfo BiotechLtd's ROCE

We're a bit apprehensive about Guangzhou Wondfo BiotechLtd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors must expect better things on the horizon though because the stock has risen 11% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Guangzhou Wondfo BiotechLtd does have some risks though, and we've spotted 3 warning signs for Guangzhou Wondfo BiotechLtd that you might be interested in.

While Guangzhou Wondfo BiotechLtd 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.