If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. That's why when we briefly looked at Yifeng Pharmacy Chain's (SHSE:603939) ROCE trend, we were pretty happy with what we saw.

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

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 Yifeng Pharmacy Chain, this is the formula:

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

0.14 = CN¥2.2b ÷ (CN¥27b - CN¥12b) (Based on the trailing twelve months to September 2024).

Therefore, Yifeng Pharmacy Chain has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 6.0% generated by the Consumer Retailing industry.

In the above chart we have measured Yifeng Pharmacy Chain'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 Yifeng Pharmacy Chain .

How Are Returns Trending?

While the current returns on capital are decent, they haven't changed much. The company has employed 179% more capital in the last five years, and the returns on that capital have remained stable at 14%. Since 14% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

Another thing to note, Yifeng Pharmacy Chain has a high ratio of current liabilities to total assets of 45%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

In the end, Yifeng Pharmacy Chain has proven its ability to adequately reinvest capital at good rates of return. However, over the last five years, the stock hasn't provided much growth to shareholders in the way of total returns. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

On a final note, we've found 1 warning sign for Yifeng Pharmacy Chain that we think you should be aware of.

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.