BAIC Motor (HKG:1958) Is Reinvesting To Multiply In Value

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. With that in mind, the ROCE of BAIC Motor (HKG:1958) looks attractive right now, so lets see what the trend of returns can tell us.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for BAIC Motor, this is the formula:

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

0.27 = CN¥26b ÷ (CN¥179b - CN¥83b) (Based on the trailing twelve months to September 2022).

Thus, BAIC Motor has an ROCE of 27%. That's a fantastic return and not only that, it outpaces the average of 0.2% earned by companies in a similar industry.

View our latest analysis for BAIC Motor

Above you can see how the current ROCE for BAIC Motor 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 report for BAIC Motor.

So How Is BAIC Motor's ROCE Trending?

We'd be pretty happy with returns on capital like BAIC Motor. Over the past five years, ROCE has remained relatively flat at around 27% and the business has deployed 27% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If BAIC Motor can keep this up, we'd be very optimistic about its future.

Another thing to note, BAIC Motor has a high ratio of current liabilities to total assets of 47%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From BAIC Motor's ROCE

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. What's surprising though is that the stock has collapsed 76% over the last five years, so there might be other areas of the business hurting its prospects. In any case, we like the underlying trends and would look further into this stock.

Like most companies, BAIC Motor does come with some risks, and we've found 1 warning sign that you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.