Has Baidu (NASDAQ:BIDU) Got What It Takes To Become A Multi-Bagger?
If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Baidu (NASDAQ:BIDU) 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 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 Baidu is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.042 = CN¥10b ÷ (CN¥304b - CN¥60b) (Based on the trailing twelve months to June 2020).
Therefore, Baidu has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Interactive Media and Services industry average of 6.7%.
Check out our latest analysis for Baidu
Above you can see how the current ROCE for Baidu compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Baidu here for free.
What Does the ROCE Trend For Baidu Tell Us?
When we looked at the ROCE trend at Baidu, we didn't gain much confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 4.2%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.
What We Can Learn From Baidu's ROCE
In summary, Baidu is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 11% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Baidu has the makings of a multi-bagger.
Baidu does have some risks though, and we've spotted 3 warning signs for Baidu that you might be interested in.
While Baidu isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
This article by Simply Wall St is general in nature. 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.
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