Anhui Gourgen Traffic ConstructionLtd (SHSE:603815) Is Reinvesting At Lower Rates Of Return

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Although, when we looked at Anhui Gourgen Traffic ConstructionLtd (SHSE:603815), it didn't seem to tick all of these boxes.

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 Anhui Gourgen Traffic ConstructionLtd:

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

0.087 = CN¥304m ÷ (CN¥10b - CN¥6.8b) (Based on the trailing twelve months to June 2024).

Therefore, Anhui Gourgen Traffic ConstructionLtd has an ROCE of 8.7%. In absolute terms, that's a low return, but it's much better than the Construction industry average of 5.7%.

View our latest analysis for Anhui Gourgen Traffic ConstructionLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Anhui Gourgen Traffic ConstructionLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Anhui Gourgen Traffic ConstructionLtd.

What Does the ROCE Trend For Anhui Gourgen Traffic ConstructionLtd Tell Us?

Unfortunately, the trend isn't great with ROCE falling from 13% five years ago, while capital employed has grown 184%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Anhui Gourgen Traffic ConstructionLtd might not have received a full period of earnings contribution from it. Additionally, we found that Anhui Gourgen Traffic ConstructionLtd's most recent EBIT figure is around the same as the prior year, so we'd attribute the drop in ROCE mostly to the capital raise.

On a separate but related note, it's important to know that Anhui Gourgen Traffic ConstructionLtd has a current liabilities to total assets ratio of 66%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

In summary, we're somewhat concerned by Anhui Gourgen Traffic ConstructionLtd's diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last five years have experienced a 57% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a separate note, we've found 1 warning sign for Anhui Gourgen Traffic ConstructionLtd you'll probably want to know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.