To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over Yixintang Pharmaceutical Group's (SZSE:002727) trend of ROCE, we liked what we saw.

Return On Capital Employed (ROCE): What Is It?

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 Yixintang Pharmaceutical Group:

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

0.14 = CN¥1.4b ÷ (CN¥16b - CN¥6.5b) (Based on the trailing twelve months to September 2023).

Therefore, Yixintang Pharmaceutical Group has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 7.0% generated by the Consumer Retailing industry.

Check out our latest analysis for Yixintang Pharmaceutical Group

In the above chart we have measured Yixintang Pharmaceutical Group's 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 Yixintang Pharmaceutical Group here for free.

What Does the ROCE Trend For Yixintang Pharmaceutical Group Tell Us?

While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 14% and the business has deployed 106% more capital into its operations. 14% is a pretty standard return, and it provides some comfort knowing that Yixintang Pharmaceutical Group has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

Our Take On Yixintang Pharmaceutical Group's ROCE

The main thing to remember is that Yixintang Pharmaceutical Group has proven its ability to continually reinvest at respectable rates of return. And given the stock has only risen 22% over the last five years, we'd suspect the market is beginning to recognize these trends. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.

On a separate note, we've found 1 warning sign for Yixintang Pharmaceutical Group you'll probably want to know about.

While Yixintang Pharmaceutical Group 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.