Stock Analysis

Shenzhen Expressway (HKG:548) Will Want To Turn Around Its Return Trends

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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Having said that, from a first glance at Shenzhen Expressway (HKG:548) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. 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¥2.4b ÷ (CN¥67b - CN¥21b) (Based on the trailing twelve months to September 2023).

Therefore, Shenzhen Expressway has an ROCE of 5.1%. Ultimately, that's a low return and it under-performs the Infrastructure industry average of 6.5%.

View our latest analysis for Shenzhen Expressway

SEHK:548 Return on Capital Employed February 13th 2024

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'd like to see what analysts are forecasting going forward, you should check out our free report for Shenzhen Expressway.

The Trend Of ROCE

The trend of ROCE doesn't look fantastic because it's fallen from 6.5% five years ago, while the business's capital employed increased by 20%. That being said, Shenzhen Expressway raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Shenzhen Expressway probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 31%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 5.1%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

What We Can Learn From Shenzhen Expressway's ROCE

In summary, we're somewhat concerned by Shenzhen Expressway's diminishing returns on increasing amounts of capital. In spite of that, the stock has delivered a 0.5% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you'd like to know more about Shenzhen Expressway, we've spotted 3 warning signs, and 1 of them doesn't sit too well with us.

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.

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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.