Returns On Capital Signal Tricky Times Ahead For 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? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Beijing-Shanghai High-Speed Railway (SHSE:601816), it didn't seem to tick all of these boxes.

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. To calculate this metric for Beijing-Shanghai High-Speed Railway, this is the formula:

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

0.048 = CN¥13b ÷ (CN¥292b - CN¥18b) (Based on the trailing twelve months to September 2023).

Thus, Beijing-Shanghai High-Speed Railway has an ROCE of 4.8%. On its own that's a low return, but compared to the average of 3.8% generated by the Transportation industry, it's much better.

View 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're interested, you can view the analysts predictions in our free analyst report for Beijing-Shanghai High-Speed Railway .

The Trend Of ROCE

When we looked at the ROCE trend at Beijing-Shanghai High-Speed Railway, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.8% from 8.5% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Beijing-Shanghai High-Speed Railway's ROCE

While returns have fallen for Beijing-Shanghai High-Speed Railway in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Beijing-Shanghai High-Speed Railway could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 601816 on our platform quite valuable.

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.