Investors Shouldn't Overlook China Biotech Services Holdings' (HKG:8037) Impressive Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 looked at the ROCE trend of China Biotech Services Holdings (HKG:8037) we really liked what we saw.

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. The formula for this calculation on China Biotech Services Holdings is:

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

0.38 = HK$154m ÷ (HK$436m - HK$35m) (Based on the trailing twelve months to September 2020).

So, China Biotech Services Holdings has an ROCE of 38%. That's a fantastic return and not only that, it outpaces the average of 9.5% earned by companies in a similar industry.

Check out our latest analysis for China Biotech Services Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating China Biotech Services Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From China Biotech Services Holdings' ROCE Trend?

We're delighted to see that China Biotech Services Holdings is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 38% which is a sight for sore eyes. In addition to that, China Biotech Services Holdings is employing 77% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

One more thing to note, China Biotech Services Holdings has decreased current liabilities to 8.1% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that China Biotech Services Holdings has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line

Overall, China Biotech Services Holdings gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And a remarkable 793% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you want to know some of the risks facing China Biotech Services Holdings we've found 2 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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This article by Simply Wall St is general in nature. 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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