Be Wary Of Baotailong New Materials (SHSE:601011) And Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 Baotailong New Materials (SHSE:601011), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

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 Baotailong New Materials, this is the formula:

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

0.018 = CN¥173m ÷ (CN¥14b - CN¥3.9b) (Based on the trailing twelve months to September 2023).

Thus, Baotailong New Materials has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 6.5%.

View our latest analysis for Baotailong New Materials

Historical performance is a great place to start when researching a stock so above you can see the gauge for Baotailong New Materials' 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 Baotailong New Materials.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Baotailong New Materials doesn't inspire confidence. Over the last five years, returns on capital have decreased to 1.8% from 5.8% five years ago. 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'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 Baotailong New Materials' ROCE

To conclude, we've found that Baotailong New Materials is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 65% in the last five years. Therefore based on the analysis done in this article, we don't think Baotailong New Materials has the makings of a multi-bagger.

If you'd like to know more about Baotailong New Materials, we've spotted 3 warning signs, and 1 of them is a bit concerning.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.