Beware of BYD Electronic (International) (HKG:285) and its returns on capital
If we want to find a potential multi-bagger, there are often underlying trends that can provide clues. In a perfect world, we would like to see a company invest more capital in their business and ideally the returns from that capital also increase. If you see this, it usually means it’s a company with a great business model and lots of profitable reinvestment opportunities. However, after briefly looking at the numbers, we don’t think BYD Electronics (International) (HKG:285) has the makings of a multi-bagger in the future, but let’s see why it might be.
Understanding return on capital employed (ROCE)
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. To calculate this metric for BYD Electronic (International), here is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.057 = CN¥1.4b ÷ (CN¥41b – CN¥16b) (Based on the last twelve months to December 2021).
Therefore, BYD Electronic (International) posted a ROCE of 5.7%. In absolute terms, this is a weak return and it is also below the communications industry average of 7.6%.
Check out our latest analysis for BYD Electronic (International)
Above, you can see how BYD Electronic’s (International) current ROCE compares to its past returns on capital, but there’s little you can say about the past. If you’re interested, you can check out analyst forecasts in our free analyst forecast report for the company.
What is the return trend?
In terms of historical ROCE movements of BYD Electronic (International), the trend is not fantastic. Over the past five years, capital returns have declined to 5.7% from 9.2% five years ago. However, given that capital employed and revenue have both increased, it appears that the company is currently continuing to grow, following short-term returns. And if the capital increase generates additional returns, the company, and therefore the shareholders, will benefit in the long term.
Elsewhere, BYD Electronic (International) did well to repay its short-term debt at 39% of total assets. So we could tie some of that to the decline in ROCE. Additionally, it may reduce some aspects of risk to the business, as the business’s suppliers or short-term creditors now fund less of its operations. Since the company is essentially funding more of its operations with its own money, one could argue that this has made the company less efficient at generating ROCE.
Even though capital returns have fallen in the short term, we think it’s promising that both revenue and capital employed have increased for BYD Electronic (International). In light of this, the stock has only gained 39% over the past five years. This security can therefore still be an attractive investment opportunity, if other fundamentals prove to be sound.
One more thing we spotted 2 warning signs facing BYD Electronic (International) which might interest you.
If you want to look for strong companies with excellent earnings, check out this free list of companies with strong balance sheets and impressive returns on equity.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.