Returns On Capital At Canggang Railway (HKG:2169) Have Hit The Brakes

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Although, when we looked at Canggang Railway (HKG:2169), it didn't seem to tick all of these boxes.

Understanding 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. To calculate this metric for Canggang Railway, this is the formula:

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

0.11 = CN¥122m ÷ (CN¥1.3b - CN¥156m) (Based on the trailing twelve months to June 2021).

Thus, Canggang Railway has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Transportation industry average of 4.3% it's much better.

Check out 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'd like to look at how Canggang Railway has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Canggang Railway's ROCE Trend?

Over the past three years, Canggang Railway's ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Canggang Railway to be a multi-bagger going forward.

The Bottom Line

We can conclude that in regards to Canggang Railway's returns on capital employed and the trends, there isn't much change to report on. Although the market must be expecting these trends to improve because the stock has gained 98% over the last year. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you'd like to know more about Canggang Railway, we've spotted 3 warning signs, and 1 of them is a bit unpleasant.

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.