Returns On Capital At Qilu Expressway (HKG:1576) Have Stalled

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over Qilu Expressway's (HKG:1576) trend of ROCE, we liked what we saw.

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. The formula for this calculation on Qilu Expressway is:

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

0.16 = CN¥909m ÷ (CN¥6.7b - CN¥976m) (Based on the trailing twelve months to December 2020).

Thus, Qilu Expressway has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Infrastructure industry average of 6.7% it's much better.

Check out our latest analysis for Qilu Expressway

Historical performance is a great place to start when researching a stock so above you can see the gauge for Qilu Expressway's ROCE against it's prior returns. If you're interested in investigating Qilu Expressway's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Qilu Expressway Tell Us?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 16% for the last five years, and the capital employed within the business has risen 76% in that time. 16% is a pretty standard return, and it provides some comfort knowing that Qilu Expressway has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

What We Can Learn From Qilu Expressway's ROCE

The main thing to remember is that Qilu Expressway has proven its ability to continually reinvest at respectable rates of return. And the stock has followed suit returning a meaningful 54% to shareholders over the last year. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

If you'd like to know about the risks facing Qilu Expressway, we've discovered 2 warning signs that you should be aware of.

While Qilu Expressway 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. 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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