Here's What To Make Of Baoye Group's (HKG:2355) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So, when we ran our eye over Baoye Group's (HKG:2355) trend of ROCE, we liked what we saw.

What is 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. Analysts use this formula to calculate it for Baoye Group:

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

0.11 = CN¥1.3b ÷ (CN¥38b - CN¥25b) (Based on the trailing twelve months to June 2020).

Thus, Baoye Group has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 10% generated by the Construction industry.

See our latest analysis for Baoye Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Baoye Group's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Baoye Group, check out these free graphs here.

How Are Returns Trending?

While the returns on capital are good, they haven't moved much. The company has consistently earned 11% for the last five years, and the capital employed within the business has risen 94% in that time. Since 11% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

Another thing to note, Baoye Group has a high ratio of current liabilities to total assets of 67%. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Baoye Group's ROCE

To sum it up, Baoye Group has simply been reinvesting capital steadily, at those decent rates of return. However, despite the favorable fundamentals, the stock has fallen 11% over the last five years, so there might be an opportunity here for astute investors. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.

If you'd like to know about the risks facing Baoye Group, we've discovered 2 warning signs that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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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