What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Jiangsu Expressway (HKG:177) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What is it?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Jiangsu Expressway is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.082 = CN¥4.5b ÷ (CN¥68b - CN¥13b) (Based on the trailing twelve months to December 2021).
Thus, Jiangsu Expressway has an ROCE of 8.2%. In absolute terms, that's a low return, but it's much better than the Infrastructure industry average of 6.3%.
View our latest analysis for Jiangsu Expressway
SEHK:177 Return on Capital Employed April 27th 2022Above you can see how the current ROCE for Jiangsu Expressway 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 Jiangsu Expressway here for free.
What Does the ROCE Trend For Jiangsu Expressway Tell Us?
In terms of Jiangsu Expressway's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 15%, but since then they've fallen to 8.2%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
The Bottom Line
In summary, despite lower returns in the short term, we're encouraged to see that Jiangsu Expressway is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 16% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
One more thing: We've identified 2 warning signs with Jiangsu Expressway (at least 1 which is significant) , and understanding these would certainly be useful.
While Jiangsu Expressway isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.