What trends should we look for if we are to identify stocks that can multiply in value over the long term? Ideally, a business will display two trends; first growth to return to on capital employed (ROCE) and on the other hand, an increase quantity capital employed. This shows us that it is a composing machine, capable of continually reinvesting its profits into the business and generating higher returns. So when we looked at the ROCE trend of BAIC engine (HKG: 1958) we really liked what we saw.
What is Return on Employee Capital (ROCE)?
For those who don’t know what ROCE is, it measures the amount of pre-tax profit a business can generate from the capital employed in its business. The formula for this calculation on BAIC Motor is:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.25 = CN ¥ 23b ÷ (CN ¥ 175b – CN ¥ 82b) (Based on the last twelve months up to September 2021).
So, BAIC Motor has a ROCE of 25%. This is a fantastic return and not only that, it exceeds the 4.4% average earned by companies in a similar industry.
Check out our latest review for BAIC Motor
Above you can see how BAIC Motor’s current ROCE compares to its previous returns on capital, but there is little you can say about the past. If you want, you can check out the analysts’ forecasts covering BAIC Motor here for free.
What the ROCE trend can tell us
BAIC Motor is showing positive trends. Figures show that over the past five years, returns on capital employed have increased dramatically to 25%. The company actually makes more money per dollar of capital used, and it should be noted that the amount of capital has also increased, by 32%. Increasing returns on an increasing amount of capital are common among multi-baggers and that is why we are impressed.
In another part of our analysis, we noticed that the ratio of the company’s current liabilities to total assets decreased to 47%, which overall means that the company relies less on its suppliers or its short-term creditors to finance its operations. This tells us that BAIC Motor has increased its returns without depending on the increase in its short-term liabilities, which we are very pleased with. Nonetheless, there are some potential risks the business bears with such high short-term liabilities, so keep that in mind.
Overall, it is great to see BAIC Motor reaping the rewards of past investments and increasing its capital base. Given that the stock has fallen 43% in the past five years, this could be a good investment if valuation and other metrics are attractive as well. However, research into current valuation metrics and the company’s future prospects seems appropriate.
On a final note, we found 2 warning signs for the BAIC engine (1 is not doing too well with us) you should be aware of.
If you’d like to see other companies driving high returns, check out our free List of high yielding companies with strong balance sheets here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.