Returns On Capital At Baoye Group (HKG:2355) Have Stalled

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Baoye Group (HKG:2355), it didn't seem to tick all of these boxes.

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

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 Baoye Group, this is the formula:

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

0.096 = CN¥1.2b ÷ (CN¥42b - CN¥29b) (Based on the trailing twelve months to December 2020).

Therefore, Baoye Group has an ROCE of 9.6%. On its own, that's a low figure but it's around the 9.1% average 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.

The Trend Of ROCE

The returns on capital haven't changed much for Baoye Group in recent years. Over the past five years, ROCE has remained relatively flat at around 9.6% and the business has deployed 93% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a separate but related note, it's important to know that Baoye Group has a current liabilities to total assets ratio of 70%, which we'd consider pretty high. 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.

The Bottom Line

Long story short, while Baoye Group has been reinvesting its capital, the returns that it's generating haven't increased. And in the last five years, the stock has given away 18% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a final note, we've found 1 warning sign for Baoye Group that we think 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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