If you're looking for a multi-bagger, there's a few things to 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Bohai Leasing (SZSE:000415) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Bohai Leasing, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.055 = CN¥12b ÷ (CN¥265b - CN¥55b) (Based on the trailing twelve months to September 2023).
Thus, Bohai Leasing has an ROCE of 5.5%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 7.3%.
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 Bohai Leasing's past further, check out this free graph covering Bohai Leasing's past earnings, revenue and cash flow.
What Does the ROCE Trend For Bohai Leasing Tell Us?
There hasn't been much to report for Bohai Leasing's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Bohai Leasing doesn't end up being a multi-bagger in a few years time.
The Key Takeaway
In summary, Bohai Leasing isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And in the last five years, the stock has given away 51% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
Like most companies, Bohai Leasing does come with some risks, and we've found 2 warning signs that you should be aware of.
While Bohai Leasing 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.