If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? 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. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. And from a first read, things don't look too good at Henan Zhongyuan Expressway (SHSE:600020), so let's see why.
Understanding 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. To calculate this metric for Henan Zhongyuan Expressway, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.039 = CN¥1.6b ÷ (CN¥51b - CN¥8.8b) (Based on the trailing twelve months to June 2023).
So, Henan Zhongyuan Expressway has an ROCE of 3.9%. In absolute terms, that's a low return but it's around the Infrastructure industry average of 4.7%.
Check out our latest analysis for Henan Zhongyuan Expressway
Historical performance is a great place to start when researching a stock so above you can see the gauge for Henan Zhongyuan Expressway's ROCE against it's prior returns. If you're interested in investigating Henan Zhongyuan Expressway's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Henan Zhongyuan Expressway Tell Us?
There is reason to be cautious about Henan Zhongyuan Expressway, given the returns are trending downwards. To be more specific, the ROCE was 6.6% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Henan Zhongyuan Expressway to turn into a multi-bagger.
In Conclusion...
In summary, it's unfortunate that Henan Zhongyuan Expressway is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 17% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.
If you want to know some of the risks facing Henan Zhongyuan Expressway we've found 3 warning signs (2 can't be ignored!) that you should be aware of before investing here.
While Henan Zhongyuan 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.
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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.
