STO ExpressLtd (SZSE:002468) May Have Issues Allocating Its Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. However, after investigating STO ExpressLtd (SZSE:002468), we don't think it's current trends fit the mold of a multi-bagger.

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 STO ExpressLtd:

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

0.092 = CN¥1.2b ÷ (CN¥24b - CN¥11b) (Based on the trailing twelve months to September 2024).

So, STO ExpressLtd has an ROCE of 9.2%. On its own that's a low return, but compared to the average of 7.5% generated by the Logistics industry, it's much better.

See our latest analysis for STO ExpressLtd

Above you can see how the current ROCE for STO ExpressLtd 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 STO ExpressLtd .

The Trend Of ROCE

In terms of STO ExpressLtd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 21%, but since then they've fallen to 9.2%. 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. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, STO ExpressLtd's current liabilities have increased over the last five years to 46% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 9.2%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that STO ExpressLtd is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 49% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

STO ExpressLtd could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 002468 on our platform quite valuable.

While STO ExpressLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.