Stock Analysis

Returns On Capital At Beijing Urban Construction Design & Development Group (HKG:1599) Paint A Concerning Picture

SEHK:1599
Source: Shutterstock

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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 Beijing Urban Construction Design & Development Group (HKG:1599), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Beijing Urban Construction Design & Development Group, this is the formula:

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

0.061 = CN¥683m ÷ (CN¥21b - CN¥9.8b) (Based on the trailing twelve months to December 2020).

So, Beijing Urban Construction Design & Development Group has an ROCE of 6.1%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 9.1%.

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

roce
SEHK:1599 Return on Capital Employed April 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.

How Are Returns Trending?

On the surface, the trend of ROCE at Beijing Urban Construction Design & Development Group doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.1% from 11% 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. If these investments prove successful, this can bode very well for long term stock performance.

Another thing to note, Beijing Urban Construction Design & Development Group has a high ratio of current liabilities to total assets of 47%. 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.

What We Can Learn From Beijing Urban Construction Design & Development Group's ROCE

While returns have fallen for Beijing Urban Construction Design & Development Group in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 39% 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.

Beijing Urban Construction Design & Development Group does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

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.

When trading Beijing Urban Construction Design & Development Group or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted


Valuation is complex, but we're helping make it simple.

Find out whether Beijing Urban Construction Design & Development Group is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020


Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.