There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Guangzhou Baiyunshan Pharmaceutical Holdings (HKG:874), it didn't seem to tick all of these boxes.

Understanding 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. The formula for this calculation on Guangzhou Baiyunshan Pharmaceutical Holdings is:

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

0.091 = CN¥3.9b ÷ (CN¥79b - CN¥36b) (Based on the trailing twelve months to September 2024).

So, Guangzhou Baiyunshan Pharmaceutical Holdings has an ROCE of 9.1%. In absolute terms, that's a low return but it's around the Healthcare industry average of 8.5%.

In the above chart we have measured Guangzhou Baiyunshan Pharmaceutical Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Guangzhou Baiyunshan Pharmaceutical Holdings for free.

What Does the ROCE Trend For Guangzhou Baiyunshan Pharmaceutical Holdings Tell Us?

When we looked at the ROCE trend at Guangzhou Baiyunshan Pharmaceutical Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 9.1%. 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, Guangzhou Baiyunshan Pharmaceutical Holdings' current liabilities are still rather high at 46% 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.

The Bottom Line

In summary, Guangzhou Baiyunshan Pharmaceutical Holdings is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 12% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Guangzhou Baiyunshan Pharmaceutical Holdings does have some risks, we noticed 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

While Guangzhou Baiyunshan Pharmaceutical Holdings 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.