Guangzhou Baiyunshan Pharmaceutical Holdings (HKG:874) Has More To Do To Multiply In Value Going Forward

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Although, when we looked at Guangzhou Baiyunshan Pharmaceutical Holdings (HKG:874), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Guangzhou Baiyunshan Pharmaceutical Holdings:

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

0.096 = CN¥4.0b ÷ (CN¥74b - CN¥33b) (Based on the trailing twelve months to September 2023).

Therefore, Guangzhou Baiyunshan Pharmaceutical Holdings has an ROCE of 9.6%. In absolute terms, that's a low return but it's around the Healthcare industry average of 11%.

View our latest analysis for Guangzhou Baiyunshan Pharmaceutical Holdings

In the above chart we have measured Guangzhou Baiyunshan Pharmaceutical Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Guangzhou Baiyunshan Pharmaceutical Holdings.

What Does the ROCE Trend For Guangzhou Baiyunshan Pharmaceutical Holdings Tell Us?

In terms of Guangzhou Baiyunshan Pharmaceutical Holdings' historical ROCE trend, it doesn't exactly demand attention. The company has employed 67% more capital in the last five years, and the returns on that capital have remained stable at 9.6%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a separate but related note, it's important to know that Guangzhou Baiyunshan Pharmaceutical Holdings has a current liabilities to total assets ratio of 44%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

Long story short, while Guangzhou Baiyunshan Pharmaceutical Holdings has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has declined 23% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing to note, we've identified 1 warning sign with Guangzhou Baiyunshan Pharmaceutical Holdings and understanding this should be part of your investment process.

While Guangzhou Baiyunshan Pharmaceutical Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.