Some Investors May Be Worried About Baowu Magnesium Technology's (SZSE:002182) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 briefly looking over the numbers, we don't think Baowu Magnesium Technology (SZSE:002182) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Baowu Magnesium Technology is:

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

0.051 = CN¥442m ÷ (CN¥12b - CN¥3.7b) (Based on the trailing twelve months to June 2024).

Thus, Baowu Magnesium Technology has an ROCE of 5.1%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 6.8%.

Check out our latest analysis for Baowu Magnesium Technology

Above you can see how the current ROCE for Baowu Magnesium Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Baowu Magnesium Technology .

How Are Returns Trending?

We weren't thrilled with the trend because Baowu Magnesium Technology's ROCE has reduced by 56% over the last five years, while the business employed 237% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Baowu Magnesium Technology might not have received a full period of earnings contribution from it.

On a related note, Baowu Magnesium Technology has decreased its current liabilities to 30% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

To conclude, we've found that Baowu Magnesium Technology is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 47% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Baowu Magnesium Technology (of which 2 are potentially serious!) that you should know about.

While Baowu Magnesium Technology may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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.