If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Guangzhou Baiyunshan Pharmaceutical Holdings (HKG:874) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Our free stock report includes 1 warning sign investors should be aware of before investing in Guangzhou Baiyunshan Pharmaceutical Holdings. Read for free now.Return On Capital Employed (ROCE): What Is It?
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. To calculate this metric for Guangzhou Baiyunshan Pharmaceutical Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.081 = CN¥3.5b ÷ (CN¥82b - CN¥39b) (Based on the trailing twelve months to December 2024).
So, Guangzhou Baiyunshan Pharmaceutical Holdings has an ROCE of 8.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.2%.
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'd like, you can check out the forecasts from the analysts covering Guangzhou Baiyunshan Pharmaceutical Holdings for free.
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. Over the last five years, returns on capital have decreased to 8.1% from 13% five years ago. However it looks like Guangzhou Baiyunshan Pharmaceutical Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
On a side note, Guangzhou Baiyunshan Pharmaceutical Holdings' current liabilities are still rather high at 48% 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. 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. Unsurprisingly, the stock has only gained 5.9% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
One more thing, we've spotted 1 warning sign facing Guangzhou Baiyunshan Pharmaceutical Holdings that you might find interesting.
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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.