If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. In light of that, when we looked at HPGC Renmintongtai Pharmaceutical (SHSE:600829) and its ROCE trend, we weren't exactly thrilled.

What Is 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 HPGC Renmintongtai Pharmaceutical, this is the formula:

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

0.12 = CN¥367m ÷ (CN¥7.2b - CN¥4.2b) (Based on the trailing twelve months to June 2024).

Thus, HPGC Renmintongtai Pharmaceutical has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 8.7% generated by the Healthcare industry.

Historical performance is a great place to start when researching a stock so above you can see the gauge for HPGC Renmintongtai Pharmaceutical's ROCE against it's prior returns. If you're interested in investigating HPGC Renmintongtai Pharmaceutical's past further, check out this free graph covering HPGC Renmintongtai Pharmaceutical's past earnings, revenue and cash flow.

What Can We Tell From HPGC Renmintongtai Pharmaceutical's ROCE Trend?

When we looked at the ROCE trend at HPGC Renmintongtai Pharmaceutical, we didn't gain much confidence. To be more specific, ROCE has fallen from 20% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, HPGC Renmintongtai Pharmaceutical's current liabilities are still rather high at 59% of total assets. 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.

Our Take On HPGC Renmintongtai Pharmaceutical's ROCE

To conclude, we've found that HPGC Renmintongtai Pharmaceutical is reinvesting in the business, but returns have been falling. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. 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.

If you'd like to know about the risks facing HPGC Renmintongtai Pharmaceutical, we've discovered 1 warning sign that you should be aware of.

While HPGC Renmintongtai Pharmaceutical 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.