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 Guangdong Marubi Biotechnology (SHSE:603983) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Guangdong Marubi Biotechnology:

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

0.059 = CN¥210m ÷ (CN¥4.4b - CN¥807m) (Based on the trailing twelve months to March 2024).

Thus, Guangdong Marubi Biotechnology has an ROCE of 5.9%. In absolute terms, that's a low return and it also under-performs the Personal Products industry average of 9.7%.

In the above chart we have measured Guangdong Marubi Biotechnology's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Guangdong Marubi Biotechnology .

So How Is Guangdong Marubi Biotechnology's ROCE Trending?

On the surface, the trend of ROCE at Guangdong Marubi Biotechnology doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.9% from 28% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Guangdong Marubi Biotechnology has decreased its current liabilities to 19% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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 Guangdong Marubi Biotechnology's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Guangdong Marubi Biotechnology. However, despite the promising trends, the stock has fallen 42% over the last three years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a final note, we've found 2 warning signs for Guangdong Marubi Biotechnology that we think you should be aware of.

While Guangdong Marubi Biotechnology 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com