We Like These Underlying Return On Capital Trends At Baolingbao BiologyLtd (SZSE:002286)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Baolingbao BiologyLtd's (SZSE:002286) returns on capital, so let's have a look.

What Is 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. Analysts use this formula to calculate it for Baolingbao BiologyLtd:

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

0.044 = CN¥92m ÷ (CN¥2.7b - CN¥631m) (Based on the trailing twelve months to June 2024).

So, Baolingbao BiologyLtd has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Food industry average of 7.2%.

See our latest analysis for Baolingbao BiologyLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Baolingbao BiologyLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Baolingbao BiologyLtd.

So How Is Baolingbao BiologyLtd's ROCE Trending?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The data shows that returns on capital have increased substantially over the last five years to 4.4%. The amount of capital employed has increased too, by 29%. So we're very much inspired by what we're seeing at Baolingbao BiologyLtd thanks to its ability to profitably reinvest capital.

One more thing to note, Baolingbao BiologyLtd has decreased current liabilities to 23% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Bottom Line

In summary, it's great to see that Baolingbao BiologyLtd can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has only returned 22% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

Like most companies, Baolingbao BiologyLtd does come with some risks, and we've found 2 warning signs that you should be aware of.

While Baolingbao BiologyLtd 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.