Investors Met With Slowing Returns on Capital At Beijing-Shanghai High-Speed Railway (SHSE:601816)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Beijing-Shanghai High-Speed Railway (SHSE:601816) and its ROCE trend, we weren't exactly thrilled.

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

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. Analysts use this formula to calculate it for Beijing-Shanghai High-Speed Railway:

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

0.07 = CN¥19b ÷ (CN¥284b - CN¥14b) (Based on the trailing twelve months to June 2024).

Therefore, Beijing-Shanghai High-Speed Railway has an ROCE of 7.0%. On its own that's a low return, but compared to the average of 4.3% generated by the Transportation industry, it's much better.

Check out our latest analysis for Beijing-Shanghai High-Speed Railway

Above you can see how the current ROCE for Beijing-Shanghai High-Speed Railway compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Beijing-Shanghai High-Speed Railway for free.

So How Is Beijing-Shanghai High-Speed Railway's ROCE Trending?

Things have been pretty stable at Beijing-Shanghai High-Speed Railway, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at Beijing-Shanghai High-Speed Railway in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger. With fewer investment opportunities, it makes sense that Beijing-Shanghai High-Speed Railway has been paying out a decent 48% of its earnings to shareholders. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.

In Conclusion...

In summary, Beijing-Shanghai High-Speed Railway isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Although the market must be expecting these trends to improve because the stock has gained 26% over the last three years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you want to continue researching Beijing-Shanghai High-Speed Railway, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.