The Trend Of High Returns At China Biotech Services Holdings (HKG:8037) Has Us Very Interested

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. And in light of that, the trends we're seeing at China Biotech Services Holdings' (HKG:8037) look very promising so lets take a look.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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%. In absolute terms that's a great return and it's even better than the Healthcare industry average of 9.8%.

See 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.

So How Is China Biotech Services Holdings' ROCE Trending?

We're delighted to see that China Biotech Services Holdings is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 38% on its capital. 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 indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 8.1%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Key Takeaway

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 556% 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.

China Biotech Services Holdings does have some risks though, and we've spotted 1 warning sign for China Biotech Services Holdings that you might be interested in.

China Biotech Services Holdings is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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