Returns On Capital At China Railway Construction Heavy Industry (SHSE:688425) Paint A Concerning Picture

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at China Railway Construction Heavy Industry (SHSE:688425) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on China Railway Construction Heavy Industry is:

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

0.055 = CN¥1.0b ÷ (CN¥28b - CN¥9.2b) (Based on the trailing twelve months to June 2024).

Therefore, China Railway Construction Heavy Industry has an ROCE of 5.5%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.5%.

See our latest analysis for China Railway Construction Heavy Industry

In the above chart we have measured China Railway Construction Heavy Industry's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering China Railway Construction Heavy Industry for free.

The Trend Of ROCE

On the surface, the trend of ROCE at China Railway Construction Heavy Industry doesn't inspire confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 5.5%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for China Railway Construction Heavy Industry have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 26% over the last three years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing to note, we've identified 2 warning signs with China Railway Construction Heavy Industry and understanding them should be part of your investment process.

While China Railway Construction Heavy Industry 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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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.