The Returns At Grand Baoxin Auto Group (HKG:1293) Provide Us With Signs Of What's To Come

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at Grand Baoxin Auto Group (HKG:1293) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on Grand Baoxin Auto Group is:

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

0.11 = CN¥1.5b ÷ (CN¥27b - CN¥13b) (Based on the trailing twelve months to June 2020).

So, Grand Baoxin Auto Group has an ROCE of 11%. By itself that's a normal return on capital and it's in line with the industry's average returns of 11%.

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.

The Trend Of ROCE

In terms of Grand Baoxin Auto Group's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 11% from 15% five years ago. However it looks like Grand Baoxin Auto Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Another thing to note, Grand Baoxin Auto Group has a high ratio of current liabilities to total assets of 50%. 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 Bottom Line

Bringing it all together, while we're somewhat encouraged by Grand Baoxin Auto Group's reinvestment in its own business, we're aware that returns are shrinking. Moreover, since the stock has crumbled 72% 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.

Grand Baoxin Auto Group does have some risks, we noticed 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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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