Stock Analysis

We're Watching These Trends At Shenzhen Expressway (HKG:548)

SEHK:548
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To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Shenzhen Expressway (HKG:548), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Shenzhen Expressway is:

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

0.03 = CN¥1.2b ÷ (CN¥51b - CN¥12b) (Based on the trailing twelve months to September 2020).

Therefore, Shenzhen Expressway has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Infrastructure industry average of 5.5%.

View our latest analysis for Shenzhen Expressway

roce
SEHK:548 Return on Capital Employed January 5th 2021

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.

So How Is Shenzhen Expressway's ROCE Trending?

The trend of ROCE doesn't look fantastic because it's fallen from 7.6% five years ago, while the business's capital employed increased by 98%. Usually this isn't ideal, but given Shenzhen Expressway conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. 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.

What We Can Learn From Shenzhen Expressway's ROCE

Bringing it all together, while we're somewhat encouraged by Shenzhen Expressway's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 64% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One final note, you should learn about the 4 warning signs we've spotted with Shenzhen Expressway (including 1 which is concerning) .

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.

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This article by Simply Wall St is general in nature. 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.
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