China Beidahuang Industry Group Holdings (HKG:39) Is Experiencing Growth In Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at China Beidahuang Industry Group Holdings (HKG:39) and its trend of ROCE, we really liked what we saw.

What Is 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 China Beidahuang Industry Group Holdings:

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

0.0081 = HK$12m ÷ (HK$2.6b - HK$1.2b) (Based on the trailing twelve months to June 2022).

Thus, China Beidahuang Industry Group Holdings has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the Retail Distributors industry average of 7.1%.

Check out our latest analysis for China Beidahuang Industry Group Holdings

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 China Beidahuang Industry Group Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Shareholders will be relieved that China Beidahuang Industry Group Holdings has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 0.8% on its capital. While returns have increased, the amount of capital employed by China Beidahuang Industry Group Holdings has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 45% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

Our Take On China Beidahuang Industry Group Holdings' ROCE

To sum it up, China Beidahuang Industry Group Holdings is collecting higher returns from the same amount of capital, and that's impressive. Given the stock has declined 43% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

If you want to know some of the risks facing China Beidahuang Industry Group Holdings we've found 2 warning signs (1 is concerning!) that you should be aware of before investing here.

While China Beidahuang Industry Group Holdings 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.