The Returns On Capital At Guizhou Transportation Planning Survey&Design AcademeLtd (SHSE:603458) Don't Inspire Confidence

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Guizhou Transportation Planning Survey&Design AcademeLtd (SHSE:603458) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Guizhou Transportation Planning Survey&Design AcademeLtd, this is the formula:

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

0.028 = CN¥109m ÷ (CN¥7.1b - CN¥3.3b) (Based on the trailing twelve months to September 2023).

Therefore, Guizhou Transportation Planning Survey&Design AcademeLtd has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Professional Services industry average of 5.9%.

See our latest analysis for Guizhou Transportation Planning Survey&Design AcademeLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Guizhou Transportation Planning Survey&Design AcademeLtd's ROCE against it's prior returns. If you'd like to look at how Guizhou Transportation Planning Survey&Design AcademeLtd has performed in the past in other metrics, you can view this free graph of Guizhou Transportation Planning Survey&Design AcademeLtd's past earnings, revenue and cash flow.

So How Is Guizhou Transportation Planning Survey&Design AcademeLtd's ROCE Trending?

In terms of Guizhou Transportation Planning Survey&Design AcademeLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 2.8% from 16% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. 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.

On a side note, Guizhou Transportation Planning Survey&Design AcademeLtd's current liabilities are still rather high at 46% of total assets. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Guizhou Transportation Planning Survey&Design AcademeLtd's ROCE

We're a bit apprehensive about Guizhou Transportation Planning Survey&Design AcademeLtd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. It should come as no surprise then that the stock has fallen 55% over the last five 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.

Guizhou Transportation Planning Survey&Design AcademeLtd does have some risks, we noticed 4 warning signs (and 1 which makes us a bit uncomfortable) we think you should 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.