What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, BAIOO Family Interactive (HKG:2100) looks quite promising in regards to its trends of return on capital.
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. The formula for this calculation on BAIOO Family Interactive is:
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%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Entertainment industry average of 14%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for BAIOO Family Interactive's ROCE against it's prior returns. 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 The Trend Of ROCE Can Tell Us
BAIOO Family Interactive's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 150% whilst employing roughly the same amount of capital. 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. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
The Bottom Line On BAIOO Family Interactive's ROCE
In summary, we're delighted to see that BAIOO Family Interactive has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And a remarkable 128% total return over the last five years tells us that investors are expecting more good things to come in the future. 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.
If you'd like to know about the risks facing BAIOO Family Interactive, we've discovered 1 warning sign that you should be aware of.
While BAIOO Family Interactive isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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