To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at COSCO SHIPPING Holdings (HKG:1919) and its trend of ROCE, we really liked what we saw.

Understanding 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. The formula for this calculation on COSCO SHIPPING Holdings is:

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

0.14 = CN¥47b ÷ (CN¥480b - CN¥134b) (Based on the trailing twelve months to September 2023).

So, COSCO SHIPPING Holdings has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 11% generated by the Shipping industry.

See our latest analysis for COSCO SHIPPING Holdings

Above you can see how the current ROCE for COSCO SHIPPING Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

Investors would be pleased with what's happening at COSCO SHIPPING Holdings. Over the last five years, returns on capital employed have risen substantially to 14%. The amount of capital employed has increased too, by 162%. So we're very much inspired by what we're seeing at COSCO SHIPPING Holdings thanks to its ability to profitably reinvest capital.

On a related note, the company's ratio of current liabilities to total assets has decreased to 28%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that COSCO SHIPPING Holdings has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From COSCO SHIPPING Holdings' ROCE

To sum it up, COSCO SHIPPING Holdings has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 444% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

COSCO SHIPPING Holdings does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

While COSCO SHIPPING Holdings 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.