Guangzhou Baiyunshan Pharmaceutical Holdings (HKG:874) Has Some Way To Go To Become A Multi-Bagger

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. That's why when we briefly looked at Guangzhou Baiyunshan Pharmaceutical Holdings' (HKG:874) ROCE trend, we were pretty happy with 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. 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)

0.10 = CN¥3.8b ÷ (CN¥70b - CN¥32b) (Based on the trailing twelve months to September 2022).

So, Guangzhou Baiyunshan Pharmaceutical Holdings has an ROCE of 10%. That's a pretty standard return and it's in line with the industry average of 10%.

See 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 The Trend Of ROCE Can Tell Us

While the current returns on capital are decent, they haven't changed much. The company has employed 92% more capital in the last five years, and the returns on that capital have remained stable at 10%. 10% is a pretty standard return, and it provides some comfort knowing that Guangzhou Baiyunshan Pharmaceutical Holdings has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 46% of total assets, this reported ROCE would probably be less than10% because total capital employed would be higher.The 10% ROCE could be even lower if current liabilities weren't 46% of total assets, because the the formula would show a larger base of total capital employed. Additionally, this high level of current liabilities isn't ideal because it means the company's suppliers (or short-term creditors) are effectively funding a large portion of the business.

In Conclusion...

In the end, Guangzhou Baiyunshan Pharmaceutical Holdings has proven its ability to adequately reinvest capital at good rates of return. However, over the last five years, the stock has only delivered a 9.5% return to shareholders who held over that period. So to determine if Guangzhou Baiyunshan Pharmaceutical Holdings is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Guangzhou Baiyunshan Pharmaceutical Holdings (of which 1 shouldn't be ignored!) that you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.