Investors Met With Slowing Returns on Capital At Grand Baoxin Auto Group (HKG:1293)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Grand Baoxin Auto Group (HKG:1293), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Grand Baoxin Auto Group:

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

0.12 = CN¥1.6b ÷ (CN¥25b - CN¥12b) (Based on the trailing twelve months to June 2022).

Therefore, Grand Baoxin Auto Group has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 11% generated by the Specialty Retail industry.

Check out our latest analysis for Grand Baoxin Auto Group

Above you can see how the current ROCE for Grand Baoxin Auto Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Grand Baoxin Auto Group.

What Does the ROCE Trend For Grand Baoxin Auto Group Tell Us?

Over the past five years, Grand Baoxin Auto Group's ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at Grand Baoxin Auto Group in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

On a side note, Grand Baoxin Auto Group's current liabilities are still rather high at 47% of total assets. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

In summary, Grand Baoxin Auto Group isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Moreover, since the stock has crumbled 84% over the last five years, it appears investors are expecting the worst. 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 Grand Baoxin Auto Group that we think you should be aware of.

While Grand Baoxin Auto Group 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.