Is There More Growth In Store For BAIOO Family Interactive's (HKG:2100) Returns On Capital?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. With that in mind, we've noticed some promising trends at BAIOO Family Interactive (HKG:2100) so let's look a bit deeper.

Understanding 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. Analysts use this formula to calculate it for BAIOO Family Interactive:

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

0.17 = CN¥287m ÷ (CN¥2.0b - CN¥289m) (Based on the trailing twelve months to June 2020).

Thus, BAIOO Family Interactive has an ROCE of 17%. That's a relatively normal return on capital, and it's around the 15% generated by the Entertainment industry.

Check out our latest analysis for BAIOO Family Interactive

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating BAIOO Family Interactive's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For BAIOO Family Interactive Tell Us?

BAIOO Family Interactive has not disappointed with their ROCE growth. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 150% over the last five years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

The Key Takeaway

To sum it up, BAIOO Family Interactive is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a staggering 407% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if BAIOO Family Interactive can keep these trends up, it could have a bright future ahead.

On a separate note, we've found 3 warning signs for BAIOO Family Interactive you'll probably want to know about.

While BAIOO Family Interactive may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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