The Returns At Guangzhou Baiyunshan Pharmaceutical Holdings (HKG:874) Aren't Growing

There are a few key trends to look for if we want to identify the next multi-bagger. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So, when we ran our eye over Guangzhou Baiyunshan Pharmaceutical Holdings' (HKG:874) trend of ROCE, we liked what we saw.

What Is Return On Capital Employed (ROCE)?

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. 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)

0.11 = CN¥4.0b ÷ (CN¥75b - CN¥37b) (Based on the trailing twelve months to December 2022).

So, Guangzhou Baiyunshan Pharmaceutical Holdings has an ROCE of 11%. By itself that's a normal return on capital and it's in line with the industry's average returns of 11%.

Check out 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 report on analyst forecasts for the company.

What Can We Tell From Guangzhou Baiyunshan Pharmaceutical Holdings' ROCE Trend?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 11% for the last five years, and the capital employed within the business has risen 86% in that time. 11% 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 another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 50% of total assets, this reported ROCE would probably be less than11% because total capital employed would be higher.The 11% ROCE could be even lower if current liabilities weren't 50% 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...

To sum it up, Guangzhou Baiyunshan Pharmaceutical Holdings has simply been reinvesting capital steadily, at those decent rates of return. However, over the last five years, the stock has only delivered a 8.6% 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.

Guangzhou Baiyunshan Pharmaceutical Holdings does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is concerning...

While Guangzhou Baiyunshan Pharmaceutical Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.