Here's What's Concerning About Shanghai International Airport's (SHSE:600009) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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 Shanghai International Airport (SHSE:600009) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Shanghai International Airport is:

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

0.03 = CN¥1.8b ÷ (CN¥69b - CN¥8.8b) (Based on the trailing twelve months to June 2024).

So, Shanghai International Airport has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Infrastructure industry average of 5.1%.

Check out our latest analysis for Shanghai International Airport

In the above chart we have measured Shanghai International Airport's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Shanghai International Airport .

How Are Returns Trending?

On the surface, the trend of ROCE at Shanghai International Airport doesn't inspire confidence. Around five years ago the returns on capital were 18%, but since then they've fallen to 3.0%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Shanghai International Airport's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Shanghai International Airport is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 54% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

While Shanghai International Airport doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for 600009 on our platform.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.