Should You Care About Yuexiu Transport Infrastructure Limited’s (HKG:1052) Investment Potential?

Today we’ll look at Yuexiu Transport Infrastructure Limited (HKG:1052) and reflect on its potential as an investment. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’

So, How Do We Calculate ROCE?

The formula for calculating the return on capital employed is:

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

Or for Yuexiu Transport Infrastructure:

0.086 = CN¥1.8b ÷ (CN¥23b – CN¥1.6b) (Based on the trailing twelve months to December 2018.)

Therefore, Yuexiu Transport Infrastructure has an ROCE of 8.6%.

See our latest analysis for Yuexiu Transport Infrastructure

Does Yuexiu Transport Infrastructure Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, Yuexiu Transport Infrastructure’s ROCE appears to be around the 8.1% average of the Infrastructure industry. Setting aside the industry comparison for now, Yuexiu Transport Infrastructure’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.

As we can see, Yuexiu Transport Infrastructure currently has an ROCE of 8.6% compared to its ROCE 3 years ago, which was 5.9%. This makes us wonder if the company is improving.

SEHK:1052 Past Revenue and Net Income, April 10th 2019
SEHK:1052 Past Revenue and Net Income, April 10th 2019

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

Yuexiu Transport Infrastructure’s Current Liabilities And Their Impact On Its ROCE

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Yuexiu Transport Infrastructure has total liabilities of CN¥1.6b and total assets of CN¥23b. Therefore its current liabilities are equivalent to approximately 7.0% of its total assets. Yuexiu Transport Infrastructure reports few current liabilities, which have a negligible impact on its unremarkable ROCE.

The Bottom Line On Yuexiu Transport Infrastructure’s ROCE

Yuexiu Transport Infrastructure looks like an ok business, but on this analysis it is not at the top of our buy list. Of course you might be able to find a better stock than Yuexiu Transport Infrastructure. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.