Here's What's Concerning About Jiangsu Expressway's (HKG:177) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 Jiangsu Expressway (HKG:177), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Jiangsu Expressway, this is the formula:

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

0.096 = CN¥5.0b ÷ (CN¥67b - CN¥16b) (Based on the trailing twelve months to June 2021).

Therefore, Jiangsu Expressway has an ROCE of 9.6%. In absolute terms, that's a low return, but it's much better than the Infrastructure industry average of 7.6%.

View our latest analysis for Jiangsu Expressway

Above you can see how the current ROCE for Jiangsu Expressway compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Jiangsu Expressway here for free.

What Can We Tell From Jiangsu Expressway's ROCE Trend?

In terms of Jiangsu Expressway's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 9.6% from 15% 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Jiangsu Expressway. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a final note, we've found 1 warning sign for Jiangsu Expressway that we think you should be aware of.

While Jiangsu 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. 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.
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