Be Wary Of Baida GroupLtd (SHSE:600865) And Its Returns On Capital

What are the early trends we should look for to identify a stock that could 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Baida GroupLtd (SHSE:600865) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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 Baida GroupLtd is:

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

0.038 = CN¥86m ÷ (CN¥2.5b - CN¥166m) (Based on the trailing twelve months to June 2024).

Therefore, Baida GroupLtd has an ROCE of 3.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.2%.

Check out our latest analysis for Baida GroupLtd

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 Baida GroupLtd has performed in the past in other metrics, you can view this free graph of Baida GroupLtd's past earnings, revenue and cash flow.

What Can We Tell From Baida GroupLtd's ROCE Trend?

On the surface, the trend of ROCE at Baida GroupLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 4.8% over the last five years. However it looks like Baida 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 may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Baida GroupLtd's ROCE

In summary, Baida GroupLtd 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 50% 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.

If you'd like to know more about Baida GroupLtd, we've spotted 4 warning signs, and 2 of them are a bit concerning.

While Baida GroupLtd 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.

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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.