Guangdong Marubi Biotechnology (SHSE:603983) Will Be Hoping To Turn Its Returns On Capital Around

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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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 Guangdong Marubi Biotechnology (SHSE:603983), we don't think it's current trends fit the mold of a multi-bagger.

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

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. To calculate this metric for Guangdong Marubi Biotechnology, this is the formula:

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

0.055 = CN¥183m ÷ (CN¥4.1b - CN¥711m) (Based on the trailing twelve months to September 2023).

Thus, Guangdong Marubi Biotechnology has an ROCE of 5.5%. Ultimately, that's a low return and it under-performs the Personal Products industry average of 9.3%.

See our latest analysis for Guangdong Marubi Biotechnology

In the above chart we have measured Guangdong Marubi Biotechnology's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Guangdong Marubi Biotechnology .

What Does the ROCE Trend For Guangdong Marubi Biotechnology Tell Us?

On the surface, the trend of ROCE at Guangdong Marubi Biotechnology doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.5% from 30% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Guangdong Marubi Biotechnology has decreased its current liabilities to 18% of total assets. That could partly explain why the ROCE has dropped. 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.

What We Can Learn From Guangdong Marubi Biotechnology's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Guangdong Marubi Biotechnology is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 37% over the last three years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a final note, we've found 1 warning sign for Guangdong Marubi Biotechnology that we think you should be aware of.

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.