There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Nanjing Well Pharmaceutical GroupLtd (SHSE:603351), we don't think it's current trends fit the mold of a multi-bagger.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Nanjing Well Pharmaceutical GroupLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.07 = CN¥118m ÷ (CN¥2.3b - CN¥602m) (Based on the trailing twelve months to September 2023).
So, Nanjing Well Pharmaceutical GroupLtd has an ROCE of 7.0%. On its own that's a low return, but compared to the average of 5.8% generated by the Chemicals industry, it's much better.
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'd like to look at how Nanjing Well Pharmaceutical GroupLtd has performed in the past in other metrics, you can view this free graph of Nanjing Well Pharmaceutical GroupLtd's past earnings, revenue and cash flow.
What Does the ROCE Trend For Nanjing Well Pharmaceutical GroupLtd Tell Us?
On the surface, the trend of ROCE at Nanjing Well Pharmaceutical GroupLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 21% over the last five years. However it looks like Nanjing Well Pharmaceutical GroupLtd 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
What We Can Learn From Nanjing Well Pharmaceutical GroupLtd's ROCE
To conclude, we've found that Nanjing Well Pharmaceutical GroupLtd is reinvesting in the business, but returns have been falling. Unsurprisingly then, the total return to shareholders over the last five years has been flat. 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.
Nanjing Well Pharmaceutical GroupLtd does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...
While Nanjing Well Pharmaceutical GroupLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.