Returns At China Beidahuang Industry Group Holdings (HKG:39) Are On The Way Up

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. 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. 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)

0.018 = HK$30m ÷ (HK$2.9b - HK$1.2b) (Based on the trailing twelve months to December 2021).

Therefore, China Beidahuang Industry Group Holdings has an ROCE of 1.8%. Ultimately, that's a low return and it under-performs the Retail Distributors industry average of 7.9%.

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'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?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The data shows that returns on capital have increased substantially over the last five years to 1.8%. Basically the business is earning more per dollar of capital invested and in addition to that, 65% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 41% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

Our Take On China Beidahuang Industry Group Holdings' ROCE

To sum it up, China Beidahuang Industry Group Holdings has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Given the stock has declined 66% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

China Beidahuang Industry Group Holdings does have some risks though, and we've spotted 2 warning signs for China Beidahuang Industry Group Holdings that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.