If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. In light of that, when we looked at Yuexiu Transport Infrastructure (HKG:1052) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Yuexiu Transport Infrastructure:

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

0.058 = CN¥1.6b ÷ (CN¥36b - CN¥8.5b) (Based on the trailing twelve months to June 2023).

So, Yuexiu Transport Infrastructure has an ROCE of 5.8%. In absolute terms, that's a low return but it's around the Infrastructure industry average of 7.2%.

View our latest analysis for Yuexiu Transport Infrastructure

In the above chart we have measured Yuexiu Transport Infrastructure'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 Yuexiu Transport Infrastructure here for free.

What Can We Tell From Yuexiu Transport Infrastructure's ROCE Trend?

When we looked at the ROCE trend at Yuexiu Transport Infrastructure, we didn't gain much confidence. To be more specific, ROCE has fallen from 8.6% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 24%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 5.8%. 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.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Yuexiu Transport Infrastructure's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 0.3% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

One final note, you should learn about the 3 warning signs we've spotted with Yuexiu Transport Infrastructure (including 1 which is concerning) .

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.