The Returns On Capital At Kingworld Medicines Group (HKG:1110) Don't Inspire Confidence

What trends should we look for it we want to identify stocks that can 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Kingworld Medicines Group (HKG:1110), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Kingworld Medicines Group, this is the formula:

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

0.082 = CN¥77m ÷ (CN¥1.5b - CN¥575m) (Based on the trailing twelve months to June 2024).

Therefore, Kingworld Medicines Group has an ROCE of 8.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.2%.

See our latest analysis for Kingworld Medicines Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kingworld Medicines Group's ROCE against it's prior returns. If you'd like to look at how Kingworld Medicines Group has performed in the past in other metrics, you can view this free graph of Kingworld Medicines Group's past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at Kingworld Medicines Group, we didn't gain much confidence. Around five years ago the returns on capital were 10%, but since then they've fallen to 8.2%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

Our Take On Kingworld Medicines Group's ROCE

Bringing it all together, while we're somewhat encouraged by Kingworld Medicines Group'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 43% in the last five years. Therefore based on the analysis done in this article, we don't think Kingworld Medicines Group has the makings of a multi-bagger.

One more thing to note, we've identified 2 warning signs with Kingworld Medicines Group and understanding them should be part of your investment process.

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.