Returns On Capital At Sichuan Hebang Biotechnology (SHSE:603077) Have Stalled

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. In light of that, when we looked at Sichuan Hebang Biotechnology (SHSE:603077) and its ROCE trend, we weren't exactly thrilled.

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

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. The formula for this calculation on Sichuan Hebang Biotechnology is:

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

0.048 = CN¥993m ÷ (CN¥26b - CN¥5.7b) (Based on the trailing twelve months to June 2024).

Therefore, Sichuan Hebang Biotechnology has an ROCE of 4.8%. Even though it's in line with the industry average of 5.5%, it's still a low return by itself.

View our latest analysis for Sichuan Hebang Biotechnology

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're interested in investigating Sichuan Hebang Biotechnology's past further, check out this free graph covering Sichuan Hebang Biotechnology's past earnings, revenue and cash flow.

What Can We Tell From Sichuan Hebang Biotechnology's ROCE Trend?

In terms of Sichuan Hebang Biotechnology's historical ROCE trend, it doesn't exactly demand attention. The company has employed 77% more capital in the last five years, and the returns on that capital have remained stable at 4.8%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

In Conclusion...

In summary, Sichuan Hebang Biotechnology has simply been reinvesting capital and generating the same low rate of return as before. And investors may be recognizing these trends since the stock has only returned a total of 14% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you want to continue researching Sichuan Hebang 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.