The 25% Return On Capital At BAIC Motor (HKG:1958) Got Our Attention

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. And in light of that, the trends we're seeing at BAIC Motor's (HKG:1958) look very promising so lets take a look.

Return On Capital Employed (ROCE): What is it?

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. 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)

0.25 = CN¥21b ÷ (CN¥197b - CN¥114b) (Based on the trailing twelve months to June 2020).

Thus, BAIC Motor has an ROCE of 25%. That's a fantastic return and not only that, it outpaces the average of 7.8% earned by companies in a similar industry.

See our latest analysis for BAIC Motor

In the above chart we have measured BAIC Motor's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

The trends we've noticed at BAIC Motor are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 25%. Basically the business is earning more per dollar of capital invested and in addition to that, 41% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Another thing to note, BAIC Motor has a high ratio of current liabilities to total assets of 58%. 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.

The Bottom Line

In summary, it's great to see that BAIC Motor can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And since the stock has fallen 34% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

If you want to continue researching BAIC Motor, you might be interested to know about the 2 warning signs that our analysis has discovered.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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This article by Simply Wall St is general in nature. 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.
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