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

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. 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.

What Is 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 Guizhou Transportation Planning Survey&Design AcademeLtd is:

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

0.0085 = CN¥30m ÷ (CN¥6.6b - CN¥3.1b) (Based on the trailing twelve months to March 2024).

Thus, Guizhou Transportation Planning Survey&Design AcademeLtd has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the Professional Services industry average of 5.7%.

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.

How Are Returns Trending?

On the surface, the trend of ROCE at Guizhou Transportation Planning Survey&Design AcademeLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 0.8% from 16% 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.

On a separate but related note, it's important to know that Guizhou Transportation Planning Survey&Design AcademeLtd has a current liabilities to total assets ratio of 47%, 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, Guizhou Transportation Planning Survey&Design AcademeLtd 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 51% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One more thing: We've identified 3 warning signs with Guizhou Transportation Planning Survey&Design AcademeLtd (at least 1 which makes us a bit uncomfortable) , and understanding them would certainly be useful.

While Guizhou Transportation Planning Survey&Design AcademeLtd 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com