Weihai Baihe Biology Technological (SHSE:603102) Could Be Struggling To Allocate Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after investigating Weihai Baihe Biology Technological (SHSE:603102), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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 Weihai Baihe Biology Technological:

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

0.098 = CN¥153m ÷ (CN¥1.7b - CN¥183m) (Based on the trailing twelve months to June 2024).

So, Weihai Baihe Biology Technological has an ROCE of 9.8%. On its own, that's a low figure but it's around the 8.2% average generated by the Personal Products industry.

View our latest analysis for Weihai Baihe Biology Technological

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Weihai Baihe Biology Technological has performed in the past in other metrics, you can view this free graph of Weihai Baihe Biology Technological's past earnings, revenue and cash flow.

What Does the ROCE Trend For Weihai Baihe Biology Technological Tell Us?

When we looked at the ROCE trend at Weihai Baihe Biology Technological, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.8% from 18% 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'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, Weihai Baihe Biology Technological has done well to pay down its current liabilities to 10% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

To conclude, we've found that Weihai Baihe Biology Technological is reinvesting in the business, but returns have been falling. And in the last year, the stock has given away 21% 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.

On a final note, we've found 1 warning sign for Weihai Baihe Biology Technological that we think you should be aware of.

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.