Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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 Guangzhou Wondfo BiotechLtd (SZSE:300482), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Guangzhou Wondfo BiotechLtd, this is the formula:

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

0.077 = CN¥477m ÷ (CN¥6.7b - CN¥490m) (Based on the trailing twelve months to June 2024).

Thus, Guangzhou Wondfo BiotechLtd has an ROCE of 7.7%. In absolute terms, that's a low return, but it's much better than the Medical Equipment industry average of 5.8%.

In the above chart we have measured Guangzhou Wondfo BiotechLtd'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 Guangzhou Wondfo BiotechLtd .

What Can We Tell From Guangzhou Wondfo BiotechLtd's ROCE Trend?

Unfortunately, the trend isn't great with ROCE falling from 19% five years ago, while capital employed has grown 166%. Usually this isn't ideal, but given Guangzhou Wondfo BiotechLtd conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Guangzhou Wondfo BiotechLtd might not have received a full period of earnings contribution from it.

What We Can Learn From Guangzhou Wondfo BiotechLtd's ROCE

To conclude, we've found that Guangzhou Wondfo BiotechLtd is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 33% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Guangzhou Wondfo BiotechLtd has the makings of a multi-bagger.

On a separate note, we've found 2 warning signs for Guangzhou Wondfo BiotechLtd you'll probably want to know about.

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.