Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Having said that, from a first glance at Jiangsu Hualan New Pharmaceutical MaterialLtd (SZSE:301093) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is 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 Jiangsu Hualan New Pharmaceutical MaterialLtd is:

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

0.026 = CN¥64m ÷ (CN¥2.6b - CN¥160m) (Based on the trailing twelve months to September 2023).

Thus, Jiangsu Hualan New Pharmaceutical MaterialLtd has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 8.0%.

See our latest analysis for Jiangsu Hualan New Pharmaceutical MaterialLtd

In the above chart we have measured Jiangsu Hualan New Pharmaceutical MaterialLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Jiangsu Hualan New Pharmaceutical MaterialLtd.

What Does the ROCE Trend For Jiangsu Hualan New Pharmaceutical MaterialLtd Tell Us?

When we looked at the ROCE trend at Jiangsu Hualan New Pharmaceutical MaterialLtd, we didn't gain much confidence. Around five years ago the returns on capital were 37%, but since then they've fallen to 2.6%. However it looks like Jiangsu Hualan New Pharmaceutical MaterialLtd 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'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, Jiangsu Hualan New Pharmaceutical MaterialLtd has done well to pay down its current liabilities to 6.1% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Jiangsu Hualan New Pharmaceutical MaterialLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Jiangsu Hualan New Pharmaceutical MaterialLtd's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly then, the total return to shareholders over the last year has been flat. Therefore based on the analysis done in this article, we don't think Jiangsu Hualan New Pharmaceutical MaterialLtd has the makings of a multi-bagger.

If you want to continue researching Jiangsu Hualan New Pharmaceutical MaterialLtd, you might be interested to know about the 2 warning signs that our analysis has discovered.

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.