Stock Analysis

Our Take On The Returns On Capital At Beijing Urban Construction Design & Development Group (HKG:1599)

SEHK:1599
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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. However, after briefly looking over the numbers, we don't think Beijing Urban Construction Design & Development Group (HKG:1599) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Beijing Urban Construction Design & Development Group:

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

0.052 = CN¥561m ÷ (CN¥20b - CN¥9.8b) (Based on the trailing twelve months to June 2020).

Therefore, Beijing Urban Construction Design & Development Group has an ROCE of 5.2%. Ultimately, that's a low return and it under-performs the Construction industry average of 11%.

See our latest analysis for Beijing Urban Construction Design & Development Group

roce
SEHK:1599 Return on Capital Employed January 13th 2021

In the above chart we have measured Beijing Urban Construction Design & Development Group'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 Beijing Urban Construction Design & Development Group here for free.

The Trend Of ROCE

When we looked at the ROCE trend at Beijing Urban Construction Design & Development Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.2% from 13% 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.

Another thing to note, Beijing Urban Construction Design & Development Group has a high ratio of current liabilities to total assets of 48%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Beijing Urban Construction Design & Development Group. However, despite the promising trends, the stock has fallen 41% over the last five years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Like most companies, Beijing Urban Construction Design & Development Group does come with some risks, and we've found 2 warning signs that you should be aware of.

While Beijing Urban Construction Design & Development Group 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. 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.
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