Daqin Railway (SHSE:601006) Will Be Hoping To Turn Its Returns On Capital Around

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Although, when we looked at Daqin Railway (SHSE:601006), it didn't seem to tick all of these boxes.

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 Daqin Railway, this is the formula:

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

0.059 = CN¥11b ÷ (CN¥210b - CN¥15b) (Based on the trailing twelve months to September 2024).

So, Daqin Railway has an ROCE of 5.9%. In absolute terms, that's a low return, but it's much better than the Transportation industry average of 4.2%.

See our latest analysis for Daqin Railway

In the above chart we have measured Daqin Railway's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Daqin Railway for free.

What Does the ROCE Trend For Daqin Railway Tell Us?

When we looked at the ROCE trend at Daqin Railway, we didn't gain much confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 5.9%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Daqin Railway's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 16% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

On a final note, we found 2 warning signs for Daqin Railway (1 doesn't sit too well with us) you should be aware of.

While Daqin Railway isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.