China Beidahuang Industry Group Holdings (HKG:39) Might Have The Makings Of A Multi-Bagger

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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)?

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. To calculate this metric for China Beidahuang Industry Group Holdings, this is the formula:

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

0.017 = HK$34m ÷ (HK$2.9b - HK$996m) (Based on the trailing twelve months to June 2021).

Thus, China Beidahuang Industry Group Holdings has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Retail Distributors industry average of 6.0%.

Check out our latest analysis for China Beidahuang Industry Group Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for China Beidahuang Industry Group Holdings' ROCE against it's prior returns. If you'd like to look at how China Beidahuang Industry Group Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For China Beidahuang Industry Group Holdings Tell Us?

China Beidahuang Industry Group Holdings has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 1.7% which is a sight for sore eyes. In addition to that, China Beidahuang Industry Group Holdings is employing 87% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 34% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

Our Take On China Beidahuang Industry Group Holdings' ROCE

Long story short, we're delighted to see that China Beidahuang Industry Group Holdings' reinvestment activities have paid off and the company is now profitable. And since the stock has dived 90% over the last five years, there may be other factors affecting the company's prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

If you want to continue researching China Beidahuang Industry Group Holdings, you might be interested to know about the 3 warning signs that our analysis has discovered.

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.