What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating ShuYu Civilian Pharmacy (SZSE:301017), we don't think it's current trends fit the mold of a multi-bagger.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for ShuYu Civilian Pharmacy, this is the formula:

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

0.056 = CN¥237m ÷ (CN¥9.6b - CN¥5.3b) (Based on the trailing twelve months to March 2024).

Thus, ShuYu Civilian Pharmacy has an ROCE of 5.6%. Even though it's in line with the industry average of 6.4%, it's still a low return by itself.

Historical performance is a great place to start when researching a stock so above you can see the gauge for ShuYu Civilian Pharmacy's ROCE against it's prior returns. If you'd like to look at how ShuYu Civilian Pharmacy has performed in the past in other metrics, you can view this free graph of ShuYu Civilian Pharmacy's past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at ShuYu Civilian Pharmacy doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.6% from 13% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

Another thing to note, ShuYu Civilian Pharmacy has a high ratio of current liabilities to total assets of 56%. 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 Key Takeaway

While returns have fallen for ShuYu Civilian Pharmacy in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 19% in the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One final note, you should learn about the 2 warning signs we've spotted with ShuYu Civilian Pharmacy (including 1 which is concerning) .

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.