Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Zhejiang Shouxiangu Pharmaceutical (SHSE:603896) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Zhejiang Shouxiangu Pharmaceutical, this is the formula:

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

0.062 = CN¥165m ÷ (CN¥3.1b - CN¥379m) (Based on the trailing twelve months to September 2024).

Therefore, Zhejiang Shouxiangu Pharmaceutical has an ROCE of 6.2%. On its own, that's a low figure but it's around the 6.9% average generated by the Personal Products industry.

Above you can see how the current ROCE for Zhejiang Shouxiangu Pharmaceutical compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Zhejiang Shouxiangu Pharmaceutical .

What Can We Tell From Zhejiang Shouxiangu Pharmaceutical's ROCE Trend?

When we looked at the ROCE trend at Zhejiang Shouxiangu Pharmaceutical, we didn't gain much confidence. Around five years ago the returns on capital were 8.1%, but since then they've fallen to 6.2%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

Our Take On Zhejiang Shouxiangu Pharmaceutical's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Zhejiang Shouxiangu Pharmaceutical have fallen, meanwhile the business is employing more capital than it was five years ago. Despite the concerning underlying trends, the stock has actually gained 14% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Zhejiang Shouxiangu Pharmaceutical (of which 1 doesn't sit too well with us!) that you should 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.