Returns On Capital Signal Tricky Times Ahead For COSCO SHIPPING Technology (SZSE:002401)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at COSCO SHIPPING Technology (SZSE:002401) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for COSCO SHIPPING Technology:

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

0.062 = CN¥109m ÷ (CN¥2.6b - CN¥833m) (Based on the trailing twelve months to September 2024).

Thus, COSCO SHIPPING Technology has an ROCE of 6.2%. On its own that's a low return, but compared to the average of 3.7% generated by the IT industry, it's much better.

Check out our latest analysis for COSCO SHIPPING Technology

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're interested in investigating COSCO SHIPPING Technology's past further, check out this free graph covering COSCO SHIPPING Technology's past earnings, revenue and cash flow.

So How Is COSCO SHIPPING Technology's ROCE Trending?

When we looked at the ROCE trend at COSCO SHIPPING Technology, we didn't gain much confidence. To be more specific, ROCE has fallen from 8.5% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, COSCO SHIPPING Technology has decreased its current liabilities to 32% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by COSCO SHIPPING Technology's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 51% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you want to know some of the risks facing COSCO SHIPPING Technology we've found 2 warning signs (1 is significant!) that you should be aware of before investing here.

While COSCO SHIPPING Technology may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.