There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Ergo, when we looked at the ROCE trends at BAIC Motor (HKG:1958), we liked what we saw.

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. The formula for this calculation on BAIC Motor is:

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

0.27 = CN¥26b ÷ (CN¥179b - CN¥83b) (Based on the trailing twelve months to September 2022).

So, BAIC Motor has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Auto industry average of 0.2%.

View our latest analysis for BAIC Motor

In the above chart we have measured BAIC Motor's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is BAIC Motor's ROCE Trending?

BAIC Motor deserves to be commended in regards to it's returns. Over the past five years, ROCE has remained relatively flat at around 27% and the business has deployed 27% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

Another thing to note, BAIC Motor has a high ratio of current liabilities to total assets of 47%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

BAIC Motor has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. What's surprising though is that the stock has collapsed 74% over the last five years, so there might be other areas of the business hurting its prospects. So in light of that'd we think it's worthwhile looking further into this stock to see if there's any areas for concern.

BAIC Motor does have some risks though, and we've spotted 1 warning sign for BAIC Motor that you might be interested in.

BAIC Motor is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.