The Returns On Capital At Jiangsu Expressway (HKG:177) Don't Inspire Confidence

Simply Wall St ·  Nov 23, 2023 17:35

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher 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?

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. To calculate this metric for Jiangsu Expressway, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.075 = CN¥5.2b ÷ (CN¥79b - CN¥10b) (Based on the trailing twelve months to September 2023).

So, Jiangsu Expressway has an ROCE of 7.5%. Even though it's in line with the industry average of 7.2%, it's still a low return by itself.

Check out our latest analysis for Jiangsu Expressway

SEHK:177 Return on Capital Employed November 23rd 2023

Above 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. Over the last five years, returns on capital have decreased to 7.5% from 13% five years ago. 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Jiangsu Expressway's ROCE

In summary, Jiangsu Expressway is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last five years, the stock has given away 11% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Jiangsu Expressway has the makings of a multi-bagger.

On a final note, we've found 1 warning sign for Jiangsu Expressway that we think you should be aware of.

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.

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