Stock Analysis

Returns On Capital Signal Tricky Times Ahead For Beijing Urban Construction Design & Development Group (HKG:1599)

SEHK:1599
Source: Shutterstock

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 investigating Beijing Urban Construction Design & Development Group (HKG:1599), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.054 = CN¥633m ÷ (CN¥21b - CN¥9.6b) (Based on the trailing twelve months to June 2021).

So, Beijing Urban Construction Design & Development Group has an ROCE of 5.4%. Ultimately, that's a low return and it under-performs the Construction industry average of 8.8%.

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

roce
SEHK:1599 Return on Capital Employed March 16th 2022

Above you can see how the current ROCE for Beijing Urban Construction Design & Development Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Beijing Urban Construction Design & Development Group.

The Trend Of ROCE

In terms of Beijing Urban Construction Design & Development Group's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 9.1%, but since then they've fallen to 5.4%. 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.

Another thing to note, Beijing Urban Construction Design & Development Group has a high ratio of current liabilities to total assets of 45%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Beijing Urban Construction Design & Development Group's ROCE

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. These growth trends haven't led to growth returns though, since the stock has fallen 54% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you'd like to know more about Beijing Urban Construction Design & Development Group, we've spotted 4 warning signs, and 1 of them doesn't sit too well with us.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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

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

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.