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. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Hangzhou Coco Healthcare ProductsLtd (SZSE:301009), it didn't seem to tick all of these boxes.

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

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. Analysts use this formula to calculate it for Hangzhou Coco Healthcare ProductsLtd:

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

0.0029 = CN¥4.3m ÷ (CN¥1.9b - CN¥462m) (Based on the trailing twelve months to June 2024).

Therefore, Hangzhou Coco Healthcare ProductsLtd has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Household Products industry average of 4.0%.

In the above chart we have measured Hangzhou Coco Healthcare ProductsLtd'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 Hangzhou Coco Healthcare ProductsLtd .

So How Is Hangzhou Coco Healthcare ProductsLtd's ROCE Trending?

When we looked at the ROCE trend at Hangzhou Coco Healthcare ProductsLtd, we didn't gain much confidence. Around five years ago the returns on capital were 18%, but since then they've fallen to 0.3%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Hangzhou Coco Healthcare ProductsLtd has decreased its current liabilities to 24% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

In summary, we're somewhat concerned by Hangzhou Coco Healthcare ProductsLtd's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 55% over the last three years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Like most companies, Hangzhou Coco Healthcare ProductsLtd does come with some risks, and we've found 1 warning sign that you should be aware of.

While Hangzhou Coco Healthcare ProductsLtd 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.