The Return Trends At BYD (HKG:1211) Look Promising

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, BYD (HKG:1211) looks quite promising in regards to its trends of return on capital.

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 BYD is:

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

0.15 = CN¥28b ÷ (CN¥591b - CN¥404b) (Based on the trailing twelve months to June 2023).

So, BYD has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 3.0% generated by the Auto industry.

Check out our latest analysis for BYD

In the above chart we have measured BYD's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering BYD here for free.

What The Trend Of ROCE Can Tell Us

BYD is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 15%. The amount of capital employed has increased too, by 160%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a side note, BYD's current liabilities are still rather high at 68% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

All in all, it's terrific to see that BYD is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 375% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

While BYD looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether 1211 is currently trading for a fair price.

While BYD isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.