If you are looking for a multi-bagger, there are a few things to look out for. Among other things, we’ll want to see two things; first, a growth return on capital employed (ROCE) and on the other hand, an expansion of the company amount capital employed. Ultimately, this demonstrates that it is a company that reinvests its profits at increasing rates of return. In light of this, when we looked Grand Baoxin Automotive Group (HKG: 1293) and its ROCE trend, we weren’t exactly thrilled.
Return on capital employed (ROCE): what is it?
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. The formula for this calculation on Grand Baoxin Auto Group is:
Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.087 = CN ¥ 1.2b ÷ (CN ¥ 29b – CN ¥ 15b) (Based on the last twelve months up to December 2020).
Therefore, Grand Baoxin Auto Group has a ROCE of 8.7%. In absolute terms, this is a low return, but it sits around the specialty retail industry average of 9.7%.
Discover our latest analyzes for Grand Baoxin Auto Group
Above you can see how Grand Baoxin Auto Group’s current ROCE compares to its past returns on capital, but you can’t say more about the past. If you want, you can view analyst forecasts covering Grand Baoxin Auto Group here for free.
What are the return trends?
When we looked at the ROCE trend at Grand Baoxin Auto Group, we didn’t gain much confidence. To be more precise, ROCE has increased by 15% over the past five years. Meanwhile, the company is using more capital, but that hasn’t changed much in terms of sales over the past 12 months, which may reflect longer-term investments. It may take some time for the business to begin to see a change in the benefits of these investments.
In addition, Grand Baoxin Auto Group has done well to repay its current liabilities at 51% of total assets. So we could relate some of that to the decrease in ROCE. In effect, this means that their suppliers or short-term creditors fund the business less, which reduces some elements of risk. Some would argue that this reduces the company’s efficiency in generating ROCE since it now finances operations more with its own money. Either way, they’re still at a pretty high level, so we’d like to see them drop more if possible.
Our point of view on the ROCE of Grand Baoxin Auto Group
In summary, Grand Baoxin Auto Group is reinvesting funds in the business for growth, but sadly it looks like sales haven’t grown much yet. It appears investors have little hope that these trends will improve and this may have partly contributed to the stock’s 85% collapse over the past five years. Overall, the inherent trends aren’t typical of multi-baggers, so if that’s what you’re looking for, we think you might have better luck elsewhere.
If you want to know some of the risks that Grand Baoxin Auto Group faces, we have found 3 warning signs (1 is a little worrying!) Which you should be aware of before investing here.
For those who like to invest in solid companies, Check it out free list of companies with strong balance sheets and high returns on equity.
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