Cabio Biotech (Wuhan) (SHSE:688089) Could Be Struggling To Allocate Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Cabio Biotech (Wuhan) (SHSE:688089), it didn't seem to tick all of these boxes.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Cabio Biotech (Wuhan), this is the formula:

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

0.056 = CN¥85m ÷ (CN¥1.6b - CN¥95m) (Based on the trailing twelve months to March 2024).

Therefore, Cabio Biotech (Wuhan) has an ROCE of 5.6%. In absolute terms, that's a low return but it's around the Chemicals industry average of 5.5%.

View our latest analysis for Cabio Biotech (Wuhan)

In the above chart we have measured Cabio Biotech (Wuhan)'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 Cabio Biotech (Wuhan) .

What Can We Tell From Cabio Biotech (Wuhan)'s ROCE Trend?

When we looked at the ROCE trend at Cabio Biotech (Wuhan), we didn't gain much confidence. Around five years ago the returns on capital were 16%, but since then they've fallen to 5.6%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

In summary, Cabio Biotech (Wuhan) is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last three years, the stock has given away 55% 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.

If you'd like to know more about Cabio Biotech (Wuhan), we've spotted 3 warning signs, and 1 of them makes us a bit uncomfortable.

While Cabio Biotech (Wuhan) 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.