What underlying fundamental trends can indicate that a company might be in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. On that note, looking into Guangshen Railway (HKG:525), we weren't too upbeat about how things were going.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Guangshen Railway is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0028 = CN¥82m ÷ (CN¥37b - CN¥7.7b) (Based on the trailing twelve months to September 2023).
Therefore, Guangshen Railway has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Transportation industry average of 7.3%.
View our latest analysis for Guangshen Railway
SEHK:525 Return on Capital Employed November 24th 2023
Above you can see how the current ROCE for Guangshen Railway 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 Guangshen Railway here for free.
What Can We Tell From Guangshen Railway's ROCE Trend?
In terms of Guangshen Railway's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 5.2% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Guangshen Railway becoming one if things continue as they have.
In Conclusion...
In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Long term shareholders who've owned the stock over the last five years have experienced a 47% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
One more thing, we've spotted 1 warning sign facing Guangshen Railway that you might find interesting.
While Guangshen Railway 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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