Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Although, when we looked at Yuexiu Transport Infrastructure (HKG:1052), it didn’t seem to tick all of these boxes.
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. Analysts use this formula to calculate it for Yuexiu Transport Infrastructure:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.058 = CN¥1.6b ÷ (CN¥36b – CN¥8.5b) (Based on the trailing twelve months to June 2023).
Therefore, Yuexiu Transport Infrastructure has an ROCE of 5.8%. On its own, that’s a low figure but it’s around the 6.5% average generated by the Infrastructure industry.
Check out our latest analysis for Yuexiu Transport Infrastructure
Above you can see how the current ROCE for Yuexiu Transport Infrastructure compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like to see what analysts are forecasting going forward, you should check out our free analyst report for Yuexiu Transport Infrastructure .
What Can We Tell From Yuexiu Transport Infrastructure’s ROCE Trend?
In terms of Yuexiu Transport Infrastructure’s historical ROCE movements, the trend isn’t fantastic. Over the last five years, returns on capital have decreased to 5.8% from 8.6% five years ago. However it looks like Yuexiu Transport Infrastructure might be reinvesting for long term growth because while capital employed has increased, the company’s sales haven’t changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
On a side note, Yuexiu Transport Infrastructure’s current liabilities have increased over the last five years to 24% of total assets, effectively distorting the ROCE to some degree. Without this increase, it’s likely that ROCE would be even lower than 5.8%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.
What We Can Learn From Yuexiu Transport Infrastructure’s ROCE
To conclude, we’ve found that Yuexiu Transport Infrastructure is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 1.9% to shareholders over the last five years. As a result, if you’re hunting for a multi-bagger, we think you’d have more luck elsewhere.
If you’d like to know more about Yuexiu Transport Infrastructure, we’ve spotted 3 warning signs, and 1 of them shouldn’t be ignored.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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Find out whether Yuexiu Transport Infrastructure is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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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.