Hainan Meilan International Airport (HKG:357) Is Finding It Tricky To Allocate Its Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. In light of that, from a first glance at Hainan Meilan International Airport (HKG:357), we've spotted some signs that it could be struggling, so let's investigate.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Hainan Meilan International Airport:

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

0.037 = CN¥175m ÷ (CN¥11b - CN¥6.1b) (Based on the trailing twelve months to June 2022).

Thus, Hainan Meilan International Airport has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Infrastructure industry average of 5.2%.

See our latest analysis for Hainan Meilan International Airport

In the above chart we have measured Hainan Meilan International Airport's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Hainan Meilan International Airport here for free.

What Does the ROCE Trend For Hainan Meilan International Airport Tell Us?

We are a bit anxious about the trends of ROCE at Hainan Meilan International Airport. Unfortunately, returns have declined substantially over the last five years to the 3.7% we see today. On top of that, the business is utilizing 36% less capital within its operations. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 56%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Bottom Line

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 148%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a separate note, we've found 1 warning sign for Hainan Meilan International Airport you'll probably want to know about.

While Hainan Meilan International Airport 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.