Investors Could Be Concerned With Guangdong Marubi Biotechnology's (SHSE:603983) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. However, after briefly looking over the numbers, we don't think Guangdong Marubi Biotechnology (SHSE:603983) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for Guangdong Marubi Biotechnology:

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

0.059 = CN¥210m ÷ (CN¥4.4b - CN¥807m) (Based on the trailing twelve months to March 2024).

Therefore, Guangdong Marubi Biotechnology has an ROCE of 5.9%. Ultimately, that's a low return and it under-performs the Personal Products industry average of 9.7%.

Check out our latest analysis for Guangdong Marubi Biotechnology

Above you can see how the current ROCE for Guangdong Marubi Biotechnology 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 Guangdong Marubi Biotechnology .

How Are Returns Trending?

When we looked at the ROCE trend at Guangdong Marubi Biotechnology, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.9% from 28% 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Guangdong Marubi Biotechnology has done well to pay down its current liabilities to 19% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Guangdong Marubi Biotechnology's ROCE

While returns have fallen for Guangdong Marubi Biotechnology in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 42% in the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you want to continue researching Guangdong Marubi Biotechnology, you might be interested to know about the 2 warning signs that our analysis has discovered.

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.

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