Baidu's (NASDAQ:BIDU) Returns On Capital Are Heading Higher

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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Baidu (NASDAQ:BIDU) so let's look a bit deeper.

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. To calculate this metric for Baidu, this is the formula:

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

0.066 = CN¥22b ÷ (CN¥415b - CN¥78b) (Based on the trailing twelve months to March 2024).

Thus, Baidu has an ROCE of 6.6%. In absolute terms, that's a low return but it's around the Interactive Media and Services industry average of 6.5%.

Check out our latest analysis for Baidu

In the above chart we have measured Baidu's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Baidu for free.

What Can We Tell From Baidu's ROCE Trend?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Over the last five years, returns on capital employed have risen substantially to 6.6%. The amount of capital employed has increased too, by 34%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Our Take On Baidu's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Baidu has. Astute investors may have an opportunity here because the stock has declined 18% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for BIDU on our platform that is definitely worth checking out.

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.