What trends should we look for it we want to identify stocks that can 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Hangzhou Minsheng Healthcare (SZSE:301507) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Hangzhou Minsheng Healthcare, this is the formula:

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

0.051 = CN¥77m ÷ (CN¥1.7b - CN¥186m) (Based on the trailing twelve months to June 2024).

So, Hangzhou Minsheng Healthcare has an ROCE of 5.1%. In absolute terms, that's a low return and it also under-performs the Personal Products industry average of 8.2%.

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

What The Trend Of ROCE Can Tell Us

In terms of Hangzhou Minsheng Healthcare's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 15% over the last five years. However it looks like Hangzhou Minsheng Healthcare 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, Hangzhou Minsheng Healthcare has done well to pay down its current liabilities to 11% of total assets. That could partly explain why the ROCE has dropped. 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 Hangzhou Minsheng Healthcare's ROCE

Bringing it all together, while we're somewhat encouraged by Hangzhou Minsheng Healthcare's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 43% in the last year. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Hangzhou Minsheng Healthcare (of which 1 makes us a bit uncomfortable!) that you should know about.

While Hangzhou Minsheng Healthcare isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.