We're Watching These Trends At Chengdu Expressway (HKG:1785)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Chengdu Expressway (HKG:1785) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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 Chengdu Expressway is:

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

0.059 = CN¥393m ÷ (CN¥8.3b - CN¥1.6b) (Based on the trailing twelve months to June 2020).

Therefore, Chengdu Expressway has an ROCE of 5.9%. Even though it's in line with the industry average of 5.6%, it's still a low return by itself.

Check out our latest analysis for Chengdu Expressway

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

How Are Returns Trending?

In terms of Chengdu Expressway's historical ROCE movements, the trend isn't fantastic. Over the last four years, returns on capital have decreased to 5.9% from 11% four years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On Chengdu Expressway's ROCE

To conclude, we've found that Chengdu Expressway is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 6.7% in the last year to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

One more thing, we've spotted 3 warning signs facing Chengdu Expressway that you might find interesting.

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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