Shareholders Would Enjoy A Repeat Of BAIC Motor's (HKG:1958) Recent Growth In Returns

By
Simply Wall St
Published
December 13, 2021
SEHK:1958
Source: Shutterstock

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. So when we looked at the ROCE trend of BAIC Motor (HKG:1958) we really liked what we saw.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on BAIC Motor is:

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

0.25 = CN¥23b ÷ (CN¥175b - CN¥82b) (Based on the trailing twelve months to September 2021).

So, BAIC Motor has an ROCE of 25%. That's a fantastic return and not only that, it outpaces the average of 4.4% earned by companies in a similar industry.

Check out our latest analysis for BAIC Motor

roce
SEHK:1958 Return on Capital Employed December 13th 2021

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, you can check out the forecasts from the analysts covering BAIC Motor here for free.

What The Trend Of ROCE Can Tell Us

BAIC Motor is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 25%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 32%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 47%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that BAIC Motor has grown its returns without a reliance on increasing their current liabilities, which we're very happy with. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

In Conclusion...

All in all, it's terrific to see that BAIC Motor is reaping the rewards from prior investments and is growing its capital base. Given the stock has declined 43% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a final note, we found 2 warning signs for BAIC Motor (1 doesn't sit too well with us) you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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