There Are Reasons To Feel Uneasy About Shenzhen Urban Transport Planning Center's (SZSE:301091) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at Shenzhen Urban Transport Planning Center (SZSE:301091) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)

0.06 = CN¥150m ÷ (CN¥3.2b - CN¥707m) (Based on the trailing twelve months to September 2024).

So, Shenzhen Urban Transport Planning Center has an ROCE of 6.0%. Even though it's in line with the industry average of 6.1%, it's still a low return by itself.

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're interested, you can view the analysts predictions in our free analyst report for Shenzhen Urban Transport Planning Center .

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

When we looked at the ROCE trend at Shenzhen Urban Transport Planning Center, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 6.0% from 33% five years ago. 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'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 related note, Shenzhen Urban Transport Planning Center has decreased its current liabilities to 22% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

To conclude, we've found that Shenzhen Urban Transport Planning Center is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 226% return in the last three years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a separate note, we've found 2 warning signs for Shenzhen Urban Transport Planning Center you'll probably want to 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.