When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. Having said that, after a brief look, Fujian Expressway DevelopmentLtd (SHSE:600033) we aren't filled with optimism, but let's investigate further.
What Is 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 Fujian Expressway DevelopmentLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.024 = CN¥380m ÷ (CN¥17b - CN¥1.0b) (Based on the trailing twelve months to September 2023).
Therefore, Fujian Expressway DevelopmentLtd has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Infrastructure industry average of 5.2%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Fujian Expressway DevelopmentLtd's ROCE against it's prior returns. If you'd like to look at how Fujian Expressway DevelopmentLtd has performed in the past in other metrics, you can view this free graph of Fujian Expressway DevelopmentLtd's past earnings, revenue and cash flow.
What Does the ROCE Trend For Fujian Expressway DevelopmentLtd Tell Us?
We are a bit worried about the trend of returns on capital at Fujian Expressway DevelopmentLtd. Unfortunately the returns on capital have diminished from the 9.3% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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. If these trends continue, we wouldn't expect Fujian Expressway DevelopmentLtd to turn into a multi-bagger.
Our Take On Fujian Expressway DevelopmentLtd's ROCE
In summary, it's unfortunate that Fujian Expressway DevelopmentLtd is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 20% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Fujian Expressway DevelopmentLtd (of which 1 is significant!) that you should know about.
While Fujian Expressway DevelopmentLtd 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.