There Are Reasons To Feel Uneasy About Guangzhou Baiyunshan Pharmaceutical Holdings' (HKG:874) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Guangzhou Baiyunshan Pharmaceutical Holdings (HKG:874) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

0.091 = CN¥3.9b ÷ (CN¥79b - CN¥36b) (Based on the trailing twelve months to September 2024).

Thus, Guangzhou Baiyunshan Pharmaceutical Holdings has an ROCE of 9.1%. In absolute terms, that's a low return but it's around the Healthcare industry average of 8.2%.

View 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 to see what analysts are forecasting going forward, you should check out our free analyst report for Guangzhou Baiyunshan Pharmaceutical Holdings .

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

On the surface, the trend of ROCE at Guangzhou Baiyunshan Pharmaceutical Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 14% 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 may take some time before the company starts to see any change in earnings from these investments.

Another thing to note, Guangzhou Baiyunshan Pharmaceutical Holdings has a high ratio of current liabilities to total assets of 46%. 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

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 19% 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.

Guangzhou Baiyunshan Pharmaceutical Holdings does have some risks, we noticed 2 warning signs (and 1 which is significant) we think you should know about.

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.