If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Hutchison Port Holdings Trust (SGX:NS8U) looks quite promising in regards to its trends of return on capital.

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. The formula for this calculation on Hutchison Port Holdings Trust is:

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

0.07 = HK$5.2b ÷ (HK$92b - HK$17b) (Based on the trailing twelve months to June 2022).

Therefore, Hutchison Port Holdings Trust has an ROCE of 7.0%. On its own that's a low return, but compared to the average of 5.7% generated by the Infrastructure industry, it's much better.

See our latest analysis for Hutchison Port Holdings Trust

Above you can see how the current ROCE for Hutchison Port Holdings Trust compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Hutchison Port Holdings Trust here for free.

The Trend Of ROCE

You'd find it hard not to be impressed with the ROCE trend at Hutchison Port Holdings Trust. The figures show that over the last five years, returns on capital have grown by 108%. The company is now earning HK$0.07 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 25% less than it was five years ago, which can be indicative of a business that's improving its efficiency. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

The Key Takeaway

In the end, Hutchison Port Holdings Trust has proven it's capital allocation skills are good with those higher returns from less amount of capital. Astute investors may have an opportunity here because the stock has declined 26% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

Hutchison Port Holdings Trust does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is potentially serious...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.