Baoshan Iron & Steel (SHSE:600019) Might Be Having Difficulty Using Its Capital Effectively

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 Baoshan Iron & Steel (SHSE:600019), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for Baoshan Iron & Steel:

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

0.062 = CN¥16b ÷ (CN¥375b - CN¥110b) (Based on the trailing twelve months to March 2024).

So, Baoshan Iron & Steel has an ROCE of 6.2%. On its own, that's a low figure but it's around the 6.7% average generated by the Metals and Mining industry.

View our latest analysis for Baoshan Iron & Steel

In the above chart we have measured Baoshan Iron & Steel'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 Baoshan Iron & Steel .

What Does the ROCE Trend For Baoshan Iron & Steel Tell Us?

On the surface, the trend of ROCE at Baoshan Iron & Steel doesn't inspire confidence. To be more specific, ROCE has fallen from 12% over the last five years. However it looks like Baoshan Iron & Steel 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 Baoshan Iron & Steel's ROCE

In summary, Baoshan Iron & Steel is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 42% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing, we've spotted 1 warning sign facing Baoshan Iron & Steel that you might find interesting.

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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.