Stock Analysis

Shenzhen Expressway (HKG:548) May Have Issues Allocating Its Capital

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There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Shenzhen Expressway (HKG:548), it didn't seem to tick all of these boxes.

What Is 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. Analysts use this formula to calculate it for Shenzhen Expressway:

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

0.051 = CN¥2.8b ÷ (CN¥72b - CN¥17b) (Based on the trailing twelve months to March 2022).

So, Shenzhen Expressway has an ROCE of 5.1%. In absolute terms, that's a low return but it's around the Infrastructure industry average of 6.0%.

View our latest analysis for Shenzhen Expressway

SEHK:548 Return on Capital Employed August 2nd 2022

In the above chart we have measured Shenzhen Expressway'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 Shenzhen Expressway here for free.

So How Is Shenzhen Expressway's ROCE Trending?

On the surface, the trend of ROCE at Shenzhen Expressway doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.1% from 6.7% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Shenzhen Expressway. Furthermore the stock has climbed 43% over the last five years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

On a final note, we found 2 warning signs for Shenzhen Expressway (1 is potentially serious) you should be aware of.

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

Valuation is complex, but we're helping make it simple.

Find out whether Shenzhen Expressway is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.