Returns At Guangzhou Baiyunshan Pharmaceutical Holdings (HKG:874) Appear To Be Weighed Down

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 ran our eye over Guangzhou Baiyunshan Pharmaceutical Holdings' (HKG:874) trend of ROCE, we 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. 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¥4.7b ÷ (CN¥79b - CN¥34b) (Based on the trailing twelve months to March 2024).

Therefore, 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%.

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're interested, you can view the analysts predictions in our free analyst report for Guangzhou Baiyunshan Pharmaceutical Holdings .

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

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 68% 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.

On a side note, Guangzhou Baiyunshan Pharmaceutical Holdings' current liabilities are still rather high at 43% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Guangzhou Baiyunshan Pharmaceutical Holdings' ROCE

In the end, Guangzhou Baiyunshan Pharmaceutical Holdings has proven its ability to adequately reinvest capital at good rates of return. However, despite the favorable fundamentals, the stock has fallen 31% over the last five years, so there might be an opportunity here for astute investors. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com