Shenzhen Urban Transport Planning Center (SZSE:301091) May Have Issues Allocating Its Capital

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. In light of that, when we looked at Shenzhen Urban Transport Planning Center (SZSE:301091) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Shenzhen Urban Transport Planning Center:

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

0.047 = CN¥113m ÷ (CN¥3.1b - CN¥641m) (Based on the trailing twelve months to June 2024).

So, Shenzhen Urban Transport Planning Center has an ROCE of 4.7%. Ultimately, that's a low return and it under-performs the Professional Services industry average of 6.1%.

See our latest analysis for Shenzhen Urban Transport Planning Center

Above you can see how the current ROCE for Shenzhen Urban Transport Planning Center compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Shenzhen Urban Transport Planning Center for free.

What Does the ROCE Trend For Shenzhen Urban Transport Planning Center Tell Us?

In terms of Shenzhen Urban Transport Planning Center's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 30%, but since then they've fallen to 4.7%. However it looks like Shenzhen Urban Transport Planning Center might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Shenzhen Urban Transport Planning Center has decreased its current liabilities to 21% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

In summary, Shenzhen Urban Transport Planning Center is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 165% gain to shareholders who have held over the last year. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Shenzhen Urban Transport Planning Center does have some risks, we noticed 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

While Shenzhen Urban Transport Planning Center 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.