Some Investors May Be Worried About Yuexiu Transport Infrastructure's (HKG:1052) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Yuexiu Transport Infrastructure (HKG:1052), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Yuexiu Transport Infrastructure:

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

0.057 = CN¥1.6b ÷ (CN¥35b - CN¥6.8b) (Based on the trailing twelve months to June 2022).

Therefore, Yuexiu Transport Infrastructure has an ROCE of 5.7%. Even though it's in line with the industry average of 5.6%, it's still a low return by itself.

Check out our latest analysis for Yuexiu Transport Infrastructure

In the above chart we have measured Yuexiu Transport Infrastructure's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Yuexiu Transport Infrastructure here for free.

So How Is Yuexiu Transport Infrastructure's ROCE Trending?

On the surface, the trend of ROCE at Yuexiu Transport Infrastructure doesn't inspire confidence. To be more specific, ROCE has fallen from 7.5% 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.

The Bottom Line On Yuexiu Transport Infrastructure's ROCE

We're a bit apprehensive about Yuexiu Transport Infrastructure because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors must expect better things on the horizon though because the stock has risen 9.4% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you want to know some of the risks facing Yuexiu Transport Infrastructure we've found 3 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

While Yuexiu Transport Infrastructure may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.