Cabio Biotech (Wuhan) (SHSE:688089) Might Be Having Difficulty Using Its Capital Effectively

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Cabio Biotech (Wuhan) (SHSE:688089) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Cabio Biotech (Wuhan):

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

0.066 = CN¥101m ÷ (CN¥1.6b - CN¥105m) (Based on the trailing twelve months to June 2024).

So, Cabio Biotech (Wuhan) has an ROCE of 6.6%. On its own that's a low return, but compared to the average of 5.5% generated by the Chemicals industry, it's much better.

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) .

How Are Returns Trending?

On the surface, the trend of ROCE at Cabio Biotech (Wuhan) doesn't inspire confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 6.6%. However it looks like Cabio Biotech (Wuhan) might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

The Bottom Line On Cabio Biotech (Wuhan)'s ROCE

Bringing it all together, while we're somewhat encouraged by Cabio Biotech (Wuhan)'s reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 29% in the last three years. Therefore based on the analysis done in this article, we don't think Cabio Biotech (Wuhan) has the makings of a multi-bagger.

If you want to continue researching Cabio Biotech (Wuhan), you might be interested to know about the 3 warning signs that our analysis has discovered.

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.