There are a few key trends to look for if we want to identify the next multi-bagger. 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. In light of that, when we looked at Hangzhou Minsheng Healthcare (SZSE:301507) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Hangzhou Minsheng Healthcare, this is the formula:

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

0.046 = CN¥71m ÷ (CN¥1.7b - CN¥176m) (Based on the trailing twelve months to September 2024).

Therefore, Hangzhou Minsheng Healthcare has an ROCE of 4.6%. In absolute terms, that's a low return and it also under-performs the Personal Products industry average of 6.6%.

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Hangzhou Minsheng Healthcare's past further, check out this free graph covering Hangzhou Minsheng Healthcare's past earnings, revenue and cash flow.

The Trend Of ROCE

On the surface, the trend of ROCE at Hangzhou Minsheng Healthcare doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.6% from 16% five years ago. However it looks like Hangzhou Minsheng Healthcare might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Hangzhou Minsheng Healthcare has done well to pay down its current liabilities to 10% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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.

What We Can Learn From Hangzhou Minsheng Healthcare's ROCE

In summary, Hangzhou Minsheng Healthcare 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 27% in the last year. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you're still interested in Hangzhou Minsheng Healthcare it's worth checking out our FREE intrinsic value approximation for 301507 to see if it's trading at an attractive price in other respects.

While Hangzhou Minsheng Healthcare isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.