What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in BaWang International (Group) Holding's (HKG:1338) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for BaWang International (Group) Holding, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.085 = CN¥13m ÷ (CN¥230m - CN¥75m) (Based on the trailing twelve months to December 2023).
Therefore, BaWang International (Group) Holding has an ROCE of 8.5%. Ultimately, that's a low return and it under-performs the Personal Products industry average of 12%.
See our latest analysis for BaWang International (Group) Holding
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're interested in investigating BaWang International (Group) Holding's past further, check out this free graph covering BaWang International (Group) Holding's past earnings, revenue and cash flow.
How Are Returns Trending?
Shareholders will be relieved that BaWang International (Group) Holding has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 8.5%, which is always encouraging. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.
Our Take On BaWang International (Group) Holding's ROCE
As discussed above, BaWang International (Group) Holding appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And since the stock has fallen 66% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
On a final note, we've found 2 warning signs for BaWang International (Group) Holding that we think you should be aware of.
While BaWang International (Group) Holding may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.