Returns Are Gaining Momentum At Grand Baoxin Auto Group (HKG:1293)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. 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 looked at Grand Baoxin Auto Group (HKG:1293) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.11 = CN¥1.5b ÷ (CN¥28b - CN¥14b) (Based on the trailing twelve months to December 2021).

Therefore, Grand Baoxin Auto Group has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Specialty Retail industry average of 10%.

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, you can check out the forecasts from the analysts covering Grand Baoxin Auto Group here for free.

The Trend Of ROCE

Investors would be pleased with what's happening at Grand Baoxin Auto Group. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 11%. The amount of capital employed has increased too, by 25%. So we're very much inspired by what we're seeing at Grand Baoxin Auto Group thanks to its ability to profitably reinvest capital.

On a side note, Grand Baoxin Auto Group's current liabilities are still rather high at 51% of total assets. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

All in all, it's terrific to see that Grand Baoxin Auto Group is reaping the rewards from prior investments and is growing its capital base. Although the company may be facing some issues elsewhere since the stock has plunged 86% in the last five years. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

On a final note, we've found 1 warning sign for Grand Baoxin Auto Group that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.