The Returns At Qilu Expressway (HKG:1576) Provide Us With Signs Of What's To Come

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Qilu Expressway (HKG:1576), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed 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)

0.14 = CN¥537m ÷ (CN¥4.4b - CN¥739m) (Based on the trailing twelve months to June 2020).

So, Qilu Expressway has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Infrastructure industry average of 5.5% it's much better.

See 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 want to delve into the historical earnings, revenue and cash flow of Qilu Expressway, check out these free graphs here.

How Are Returns Trending?

Over the past four years, Qilu Expressway's ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect Qilu Expressway to be a multi-bagger going forward.

The Bottom Line On Qilu Expressway's ROCE

In summary, Qilu Expressway isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Although the market must be expecting these trends to improve because the stock has gained 8.8% over the last year. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing, we've spotted 1 warning sign facing Qilu Expressway that you might find interesting.

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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