Here's What's Concerning About Guangdong Adway Construction (Group) Holdings' (HKG:6189) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Guangdong Adway Construction (Group) Holdings (HKG:6189) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is 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 Guangdong Adway Construction (Group) Holdings, this is the formula:

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

0.061 = CN¥58m ÷ (CN¥2.2b - CN¥1.2b) (Based on the trailing twelve months to December 2020).

Thus, Guangdong Adway Construction (Group) Holdings has an ROCE of 6.1%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 10%.

View our latest analysis for Guangdong Adway Construction (Group) Holdings

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 Guangdong Adway Construction (Group) Holdings, check out these free graphs here.

How Are Returns Trending?

When we looked at the ROCE trend at Guangdong Adway Construction (Group) Holdings, we didn't gain much confidence. To be more specific, ROCE has fallen from 28% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Guangdong Adway Construction (Group) Holdings' current liabilities are still rather high at 56% of total assets. 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

In summary, we're somewhat concerned by Guangdong Adway Construction (Group) Holdings' diminishing returns on increasing amounts of capital. This could explain why the stock has sunk a total of 87% in the last three years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we found 3 warning signs for Guangdong Adway Construction (Group) Holdings (1 can't be ignored) you should be aware of.

While Guangdong Adway Construction (Group) Holdings 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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