When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after glancing at the trends within China Infrastructure & Logistics Group (HKG:1719), we weren't too hopeful.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for China Infrastructure & Logistics Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0087 = HK$9.0m ÷ (HK$1.4b - HK$343m) (Based on the trailing twelve months to June 2024).
Therefore, China Infrastructure & Logistics Group has an ROCE of 0.9%. Ultimately, that's a low return and it under-performs the Infrastructure industry average of 5.2%.
See our latest analysis for China Infrastructure & Logistics Group
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of China Infrastructure & Logistics Group.
So How Is China Infrastructure & Logistics Group's ROCE Trending?
There is reason to be cautious about China Infrastructure & Logistics Group, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 3.7% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on China Infrastructure & Logistics Group becoming one if things continue as they have.
The Bottom Line On China Infrastructure & Logistics Group's ROCE
In summary, it's unfortunate that China Infrastructure & Logistics Group is generating lower returns from the same amount of capital. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
If you'd like to know more about China Infrastructure & Logistics Group, we've spotted 2 warning signs, and 1 of them is potentially serious.
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.