Here's What's Concerning About Guangzhou Baiyunshan Pharmaceutical Holdings' (HKG:874) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Guangzhou Baiyunshan Pharmaceutical Holdings (HKG:874), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

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 Guangzhou Baiyunshan Pharmaceutical Holdings is:

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

0.096 = CN¥4.2b ÷ (CN¥78b - CN¥34b) (Based on the trailing twelve months to June 2024).

Thus, Guangzhou Baiyunshan Pharmaceutical Holdings has an ROCE of 9.6%. On its own, that's a low figure but it's around the 8.6% average generated by the Healthcare industry.

Check out our latest analysis for Guangzhou Baiyunshan Pharmaceutical Holdings

Above you can see how the current ROCE for Guangzhou Baiyunshan Pharmaceutical 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 Guangzhou Baiyunshan Pharmaceutical Holdings for free.

How Are Returns Trending?

When we looked at the ROCE trend at Guangzhou Baiyunshan Pharmaceutical Holdings, we didn't gain much confidence. To be more specific, ROCE has fallen from 15% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Guangzhou Baiyunshan Pharmaceutical Holdings' current liabilities are still rather high at 44% of total assets. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Guangzhou Baiyunshan Pharmaceutical Holdings' ROCE

Bringing it all together, while we're somewhat encouraged by Guangzhou Baiyunshan Pharmaceutical Holdings' reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 15% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Guangzhou Baiyunshan Pharmaceutical Holdings has the makings of a multi-bagger.

If you'd like to know about the risks facing Guangzhou Baiyunshan Pharmaceutical Holdings, we've discovered 1 warning sign that you should be aware of.

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.