Stock Analysis

Shenzhen Expressway (HKG:548) Might Be Having Difficulty Using Its Capital Effectively

SEHK:548
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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Shenzhen Expressway (HKG:548) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

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 Shenzhen Expressway, this is the formula:

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).

Therefore, Shenzhen Expressway has an ROCE of 5.1%. On its own, that's a low figure but it's around the 6.3% average generated by the Infrastructure industry.

Check out our latest analysis for Shenzhen Expressway

roce
SEHK:548 Return on Capital Employed April 29th 2022

Above you can see how the current ROCE for Shenzhen Expressway compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Shenzhen Expressway's ROCE Trend?

On the surface, the trend of ROCE at Shenzhen Expressway doesn't inspire confidence. To be more specific, ROCE has fallen from 6.7% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Shenzhen Expressway's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Shenzhen Expressway is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 54% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Shenzhen Expressway (of which 1 can't be ignored!) that you should know about.

While Shenzhen Expressway may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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.

View the Free Analysis

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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.