If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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 China National Accord Medicines (SZSE:000028) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for China National Accord Medicines:

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

0.085 = CN¥2.0b ÷ (CN¥51b - CN¥28b) (Based on the trailing twelve months to June 2024).

Therefore, China National Accord Medicines has an ROCE of 8.5%. In absolute terms, that's a low return but it's around the Healthcare industry average of 8.7%.

In the above chart we have measured China National Accord Medicines' 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 China National Accord Medicines for free.

The Trend Of ROCE

In terms of China National Accord Medicines' historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 8.5% and the business has deployed 49% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a separate but related note, it's important to know that China National Accord Medicines has a current liabilities to total assets ratio of 54%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From China National Accord Medicines' ROCE

In conclusion, China National Accord Medicines has been investing more capital into the business, but returns on that capital haven't increased. Unsurprisingly, the stock has only gained 3.3% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

On a separate note, we've found 1 warning sign for China National Accord Medicines you'll probably want to know about.

While China National Accord Medicines 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.