We're Watching These Trends At China Infrastructure & Logistics Group (HKG:1719)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at China Infrastructure & Logistics Group (HKG:1719), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for China Infrastructure & Logistics Group:

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

0.023 = HK$26m ÷ (HK$1.7b - HK$577m) (Based on the trailing twelve months to June 2020).

Thus, China Infrastructure & Logistics Group has an ROCE of 2.3%. In absolute terms, that's a low return and it also under-performs the Infrastructure industry average of 5.6%.

View our latest analysis for China Infrastructure & Logistics Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for China Infrastructure & Logistics Group's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of China Infrastructure & Logistics Group, check out these free graphs here.

What Does the ROCE Trend For China Infrastructure & Logistics Group Tell Us?

When we looked at the ROCE trend at China Infrastructure & Logistics Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.3% from 10% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, China Infrastructure & Logistics Group's current liabilities have increased over the last five years to 33% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 2.3%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for China Infrastructure & Logistics Group. And the stock has followed suit returning a meaningful 58% to shareholders over the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

China Infrastructure & Logistics Group does have some risks, we noticed 5 warning signs (and 2 which can't be ignored) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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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