Beijing Caishikou Department StoreLtd (SHSE:605599) Knows How To Allocate Capital

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. That's why when we briefly looked at Beijing Caishikou Department StoreLtd's (SHSE:605599) ROCE trend, we were very happy with what we saw.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Beijing Caishikou Department StoreLtd is:

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

0.24 = CN¥879m ÷ (CN¥6.2b - CN¥2.5b) (Based on the trailing twelve months to September 2023).

So, Beijing Caishikou Department StoreLtd has an ROCE of 24%. That's a fantastic return and not only that, it outpaces the average of 4.9% earned by companies in a similar industry.

Check out our latest analysis for Beijing Caishikou Department StoreLtd

Above you can see how the current ROCE for Beijing Caishikou Department StoreLtd 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 Beijing Caishikou Department StoreLtd .

What Can We Tell From Beijing Caishikou Department StoreLtd's ROCE Trend?

It's hard not to be impressed by Beijing Caishikou Department StoreLtd's returns on capital. Over the past five years, ROCE has remained relatively flat at around 24% and the business has deployed 94% more capital into its operations. Now considering ROCE is an attractive 24%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. You'll see this when looking at well operated businesses or favorable business models.

The Key Takeaway

In summary, we're delighted to see that Beijing Caishikou Department StoreLtd has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And since the stock has risen strongly over the last year, it appears the market might expect this trend to continue. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

One more thing: We've identified 2 warning signs with Beijing Caishikou Department StoreLtd (at least 1 which is a bit unpleasant) , and understanding them would certainly be useful.

Beijing Caishikou Department StoreLtd is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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.