Returns on Capital Signal Hard times ahead for Baidu (NASDAQ: BIDU)
Finding a business that has the potential to grow significantly isn’t easy, but it is possible if we take a look at a few key financial metrics. Generally, we will want to notice a growing trend to return to on capital employed (ROCE) and at the same time, a based capital employed. Basically, it means that a business has profitable initiatives that it can keep reinvesting in, which is a hallmark of a dialing machine. However, after briefly reviewing the numbers, we don’t think Baidu (NASDAQ: BIDU) has the makings of a multi-bagger going forward, but let’s see why it may be.
Understanding Return on Capital Employed (ROCE)
If you’ve never worked with ROCE before, it measures the “return” (profit before tax) that a business generates on capital employed in its business. The formula for this calculation on Baidu is:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.047 = CN ¥ 15b ÷ (CN ¥ 384b – CN ¥ 74b) (Based on the last twelve months up to September 2021).
So, Baidu has a ROCE of 4.7%. In absolute terms, that’s a low return, and it’s also below the interactive media and services industry average of 11%.
See our latest review for Baidu
In the graph above, we measured Baidu’s past ROCE against its past performance, but arguably the future is more important. If you’d like to see what analysts are forecasting for the future, you should check out our free report for Baidu.
What the ROCE trend can tell us
In terms of Baidu’s historic ROCE movements, the trend is not great. To be more precise, ROCE has increased by 8.6% over the past five years. Although, as both income and the amount of assets used in the business have increased, this could suggest that the business is investing in growth and that the additional capital has resulted in a short-term reduction in ROCE. If these investments prove to be successful, it can bode very well for stock performance in the long run.
In summary, despite lower returns in the short term, we are encouraged to see that Baidu is reinvesting for growth and therefore has higher sales. And there might be an opportunity here if other metrics look good as well, as the stock has fallen 16% in the past five years. Accordingly, we recommend that you dig deeper into this stock to find out what other business fundamentals can show us.
On a separate note, we have found 3 warning signs for Baidu you will probably want to know more.
While Baidu does not currently generate the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. Check it out free list here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.