Many Would Be Envious Of Anhui Huaheng Biotechnology's (SHSE:688639) Excellent Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So, when we ran our eye over Anhui Huaheng Biotechnology's (SHSE:688639) trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Anhui Huaheng Biotechnology, this is the formula:

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

0.21 = CN¥490m ÷ (CN¥4.0b - CN¥1.7b) (Based on the trailing twelve months to December 2023).

So, Anhui Huaheng Biotechnology has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 5.5% earned by companies in a similar industry.

View our latest analysis for Anhui Huaheng Biotechnology

Above you can see how the current ROCE for Anhui Huaheng Biotechnology compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Anhui Huaheng Biotechnology .

So How Is Anhui Huaheng Biotechnology's ROCE Trending?

We'd be pretty happy with returns on capital like Anhui Huaheng Biotechnology. Over the past five years, ROCE has remained relatively flat at around 21% and the business has deployed 511% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Anhui Huaheng Biotechnology can keep this up, we'd be very optimistic about its future.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 42% of total assets, this reported ROCE would probably be less than21% because total capital employed would be higher.The 21% ROCE could be even lower if current liabilities weren't 42% of total assets, because the the formula would show a larger base of total capital employed. So with current liabilities at such high levels, this effectively means the likes of suppliers or short-term creditors are funding a meaningful part of the business, which in some instances can bring some risks.

The Bottom Line

In summary, we're delighted to see that Anhui Huaheng Biotechnology has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. However, over the last three years, the stock has only delivered a 12% return to shareholders who held over that period. So to determine if Anhui Huaheng Biotechnology is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

One final note, you should learn about the 3 warning signs we've spotted with Anhui Huaheng Biotechnology (including 1 which is a bit concerning) .

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.