Investors Could Be Concerned With Canggang Railway's (HKG:2169) Returns On Capital

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after glancing at the trends within Canggang Railway (HKG:2169), we weren't too hopeful.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Canggang Railway:

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

0.086 = CN¥101m ÷ (CN¥1.4b - CN¥211m) (Based on the trailing twelve months to June 2022).

Thus, Canggang Railway has an ROCE of 8.6%. In absolute terms, that's a low return but it's around the Transportation industry average of 7.2%.

See our latest analysis for Canggang Railway

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

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at Canggang Railway. About four years ago, returns on capital were 13%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Canggang Railway becoming one if things continue as they have.

The Bottom Line On Canggang Railway's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. However the stock has delivered a 87% return to shareholders over the last year, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you want to continue researching Canggang Railway, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Canggang Railway isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.