Investors Will Want China Beidahuang Industry Group Holdings' (HKG:39) Growth In ROCE To Persist

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in China Beidahuang Industry Group Holdings' (HKG:39) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

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 China Beidahuang Industry Group Holdings is:

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

0.024 = HK$48m ÷ (HK$3.0b - HK$1.0b) (Based on the trailing twelve months to December 2020).

Therefore, China Beidahuang Industry Group Holdings has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Retail Distributors industry average of 4.9%.

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

So How Is China Beidahuang Industry Group Holdings' ROCE Trending?

We're delighted to see that China Beidahuang Industry Group Holdings is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 2.4% on its capital. Not only that, but the company is utilizing 92% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

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. Although the company may be facing some issues elsewhere since the stock has plunged 78% in the last five years. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

On a final note, we've found 3 warning signs for China Beidahuang Industry Group Holdings 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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