Shenzhen Urban Transport Planning Center (SZSE:301091) Might Be Having Difficulty Using Its Capital Effectively

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. 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)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Shenzhen Urban Transport Planning Center is:

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

0.056 = CN¥134m ÷ (CN¥3.1b - CN¥708m) (Based on the trailing twelve months to March 2024).

Thus, Shenzhen Urban Transport Planning Center has an ROCE of 5.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.7%.

Check out 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 to see what analysts are forecasting going forward, you should check out our free analyst report for Shenzhen Urban Transport Planning Center .

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

On the surface, the trend of ROCE at Shenzhen Urban Transport Planning Center doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.6% from 27% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Shenzhen Urban Transport Planning Center has done well to pay down its current liabilities to 23% of total assets. So we could link some of this to the decrease in ROCE. 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 On Shenzhen Urban Transport Planning Center's ROCE

While returns have fallen for Shenzhen Urban Transport Planning Center in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has done incredibly well with a 117% return over the last year, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

One final note, you should learn about the 2 warning signs we've spotted with Shenzhen Urban Transport Planning Center (including 1 which is concerning) .

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.

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