Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at COSCO SHIPPING International (Hong Kong) (HKG:517) and its trend of ROCE, we really liked what we saw.
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 COSCO SHIPPING International (Hong Kong), this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.027 = HK$228m ÷ (HK$9.2b - HK$865m) (Based on the trailing twelve months to June 2023).
So, COSCO SHIPPING International (Hong Kong) has an ROCE of 2.7%. In absolute terms, that's a low return and it also under-performs the Infrastructure industry average of 6.7%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for COSCO SHIPPING International (Hong Kong)'s ROCE against it's prior returns. If you're interested in investigating COSCO SHIPPING International (Hong Kong)'s past further, check out this free graph covering COSCO SHIPPING International (Hong Kong)'s past earnings, revenue and cash flow.
The Trend Of ROCE
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 58% over the last five years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
The Bottom Line On COSCO SHIPPING International (Hong Kong)'s ROCE
To sum it up, COSCO SHIPPING International (Hong Kong) is collecting higher returns from the same amount of capital, and that's impressive. And a remarkable 107% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
One more thing to note, we've identified 1 warning sign with COSCO SHIPPING International (Hong Kong) and understanding it should be part of your investment process.
While COSCO SHIPPING International (Hong Kong) 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.