We Like These Underlying Return On Capital Trends At Gushengtang Holdings (HKG:2273)

Did you know there are some financial metrics that can provide clues of a potential 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Gushengtang Holdings (HKG:2273) and its trend of ROCE, we really liked what we saw.

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What Is 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 Gushengtang Holdings:

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

0.12 = CN¥345m ÷ (CN¥3.7b - CN¥763m) (Based on the trailing twelve months to December 2024).

Therefore, Gushengtang Holdings has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Healthcare industry average of 8.2% it's much better.

View our latest analysis for Gushengtang Holdings

Above you can see how the current ROCE for Gushengtang Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Gushengtang Holdings for free.

So How Is Gushengtang Holdings' ROCE Trending?

The fact that Gushengtang Holdings is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses three years ago, but now it's earning 12% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Gushengtang Holdings is utilizing 55% more capital than it was three years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

The Key Takeaway

In summary, it's great to see that Gushengtang Holdings has managed to break into profitability and is continuing to reinvest in its business. Since the stock has only returned 4.7% to shareholders over the last three years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

While Gushengtang Holdings looks impressive, no company is worth an infinite price. The intrinsic value infographic for 2273 helps visualize whether it is currently trading for a fair price.

While Gushengtang 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.