# Jiangsu Expressway Company Limited (HKG:177): What Are Investors Earning On Their Capital?

I am writing today to help inform people who are new to the stock market and looking to gauge the potential return on investment in Jiangsu Expressway Company Limited (HKG:177).

If you purchase a 177 share you are effectively becoming a partner with many other shareholders. This share represents a portion of capital used by the company to operate the business, and it is important the company is able to use the capital base efficiently to create adequate cash flows for you as an investor. Your return is tied to 177’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. Therefore, looking at how efficiently Jiangsu Expressway is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.

### ROCE: Explanation and Calculation

You only have a finite amount of capital to invest, so there are only so many companies that you can add to your portfolio. The cost of missing out on another opportunity comes in the form of the potential long term gain you could’ve received, which is dependent on the gap between the return on capital you could’ve achieved and that of the company you invested in. Hence, capital returns are very important, and should be examined before you invest in conjunction with a certain benchmark that represents the minimum return you require to be compensated for the risk of missing out on other potentially lucrative investments. A good metric to use is return on capital employed (ROCE), which helps us gauge how much income can be created from the funds needed to operate the business. This metric will tell us if Jiangsu Expressway is good at growing investor capital. Take a look at the formula box beneath:

ROCE Calculation for 177

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = CN¥5.13b ÷ (CN¥45.33b – CN¥7.35b) = 13.50%

The calculation above shows that 177’s earnings were 13.50% of capital employed. This makes Jiangsu Expressway slightly mediocre when compared to a robust 15% ROCE yardstick. So if this rate continues in to the future, investor capital will be able to compound over time, but still may be missing out on some potential growth elsewhere.

### A deeper look

The underperforming ROCE is not ideal for Jiangsu Expressway investors if the company is unable to turn things around. But if the underlying variables (earnings and capital employed) improve, 177’s ROCE may increase, in which case your portfolio could benefit from holding the company. Therefore, investors need to understand the trend of the inputs in the formula above, so that they can see if there is an opportunity to invest. Looking three years in the past, it is evident that 177’s ROCE has deteriorated from 13.96%, indicating the company’s capital returns have declined. Over the same period, EBT went from CN¥3.13b to CN¥5.13b but capital employed has grown by a relatively larger volume as a result of an increase in total assets , indicating that the previous growth in earnings has not been able to improve ROCE because the company now needs to employ more capital to operate the business.

### Next Steps

ROCE for 177 investors has fallen in the last few years and is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. Before making any decisions, ROCE does not tell the whole picture so you need to pay attention to other fundamentals like future prospects and valuation. If you’re building your portfolio and want to take a deeper look, I’ve added a few links below that will help you further evaluate 177 or move on to other alternatives.

1. Future Outlook: What are well-informed industry analysts predicting for 177’s future growth? Take a look at our free research report of analyst consensus for 177’s outlook.
2. Valuation: What is 177 worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether 177 is currently undervalued by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.