Guangzhou Baiyun International Airport (SHSE:600004) Is Finding It Tricky To Allocate Its Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. On that note, looking into Guangzhou Baiyun International Airport (SHSE:600004), we weren't too upbeat about how things were going.

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 Guangzhou Baiyun International Airport, this is the formula:

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

0.055 = CN¥1.1b ÷ (CN¥27b - CN¥6.2b) (Based on the trailing twelve months to September 2024).

Thus, Guangzhou Baiyun International Airport has an ROCE of 5.5%. Even though it's in line with the industry average of 4.9%, it's still a low return by itself.

View our latest analysis for Guangzhou Baiyun International Airport

Above you can see how the current ROCE for Guangzhou Baiyun International Airport 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 Guangzhou Baiyun International Airport .

So How Is Guangzhou Baiyun International Airport's ROCE Trending?

There is reason to be cautious about Guangzhou Baiyun International Airport, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 6.9% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Guangzhou Baiyun International Airport to turn into a multi-bagger.

What We Can Learn From Guangzhou Baiyun International Airport's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Long term shareholders who've owned the stock over the last five years have experienced a 45% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know about the risks facing Guangzhou Baiyun International Airport, we've discovered 1 warning sign that you should be aware of.

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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.