Will Huayu Expressway Group (HKG:1823) Multiply In Value Going Forward?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Huayu Expressway Group (HKG:1823) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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).

Thus, Huayu Expressway Group has an ROCE of 8.3%. On its own, that's a low figure but it's around the 10% average generated by the Construction industry.

Check out our latest analysis for Huayu Expressway Group

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Huayu Expressway Group, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

In terms of Huayu Expressway Group's historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 8.3% and the business has deployed 47% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On a side note, Huayu Expressway Group has done well to reduce current liabilities to 10% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

The Bottom Line

In conclusion, Huayu Expressway Group has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has declined 11% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Huayu Expressway Group does have some risks, we noticed 3 warning signs (and 1 which is concerning) we think you should know about.

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.

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