Here's What To Make Of Huayu Expressway Group's (HKG:1823) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Huayu Expressway Group (HKG:1823) and its ROCE trend, we weren't exactly thrilled.

What is 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. To calculate this metric for Huayu Expressway Group, this is the formula:

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

0.083 = HK$127m ÷ (HK$1.7b - HK$170m) (Based on the trailing twelve months to June 2020).

Therefore, Huayu Expressway Group has an ROCE of 8.3%. In absolute terms, that's a low return but it's around the Construction industry average of 10%.

Check out our latest analysis for Huayu Expressway Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Huayu Expressway Group's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Huayu Expressway Group, check out these free graphs here.

The Trend Of ROCE

The returns on capital haven't changed much for Huayu Expressway Group in recent years. The company has employed 47% more capital in the last five years, and the returns on that capital have remained stable at 8.3%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a side note, Huayu Expressway Group has done well to reduce current liabilities to 10% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line On Huayu Expressway Group's ROCE

As we've seen above, Huayu Expressway Group's returns on capital haven't increased but it is reinvesting in the business. Unsurprisingly, the stock has only gained 31% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

If you want to know some of the risks facing Huayu Expressway Group we've found 3 warning signs (1 is concerning!) that you should be aware of before investing here.

While Huayu Expressway Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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