China Pioneer Pharma Holdings (HKG:1345) Will Be Looking To Turn Around Its Returns

What financial metrics can indicate to us that a company is maturing or even in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within China Pioneer Pharma Holdings (HKG:1345), we weren't too hopeful.

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. Analysts use this formula to calculate it for China Pioneer Pharma Holdings:

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

0.077 = CN¥73m ÷ (CN¥1.4b - CN¥484m) (Based on the trailing twelve months to December 2020).

So, China Pioneer Pharma Holdings has an ROCE of 7.7%. On its own, that's a low figure but it's around the 9.6% average generated by the Healthcare industry.

View our latest analysis for China Pioneer Pharma Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for China Pioneer Pharma Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of China Pioneer Pharma Holdings, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

In terms of China Pioneer Pharma Holdings' historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 25% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect China Pioneer Pharma Holdings to turn into a multi-bagger.

The Key Takeaway

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. And long term shareholders have watched their investments stay flat over the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

China Pioneer Pharma Holdings does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

While China Pioneer Pharma Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.
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