What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at China Merchants Port Group (SZSE:001872) so let's look a bit deeper.
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 China Merchants Port Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.025 = CN¥4.2b ÷ (CN¥199b - CN¥29b) (Based on the trailing twelve months to December 2023).
Therefore, China Merchants Port Group has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Infrastructure industry average of 5.2%.
Above you can see how the current ROCE for China Merchants Port Group 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 analyst report for China Merchants Port Group .
The Trend Of ROCE
We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The data shows that returns on capital have increased substantially over the last five years to 2.5%. Basically the business is earning more per dollar of capital invested and in addition to that, 43% more capital is being employed now too. So we're very much inspired by what we're seeing at China Merchants Port Group thanks to its ability to profitably reinvest capital.
The Bottom Line
All in all, it's terrific to see that China Merchants Port Group is reaping the rewards from prior investments and is growing its capital base. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 17% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
China Merchants Port Group does have some risks though, and we've spotted 1 warning sign for China Merchants Port Group that you might be interested in.
While China Merchants Port Group 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.