Investors Could Be Concerned With Ningbo Zhoushan Port's (SHSE:601018) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. However, after briefly looking over the numbers, we don't think Ningbo Zhoushan Port (SHSE:601018) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Ningbo Zhoushan Port, this is the formula:

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

0.052 = CN¥4.7b ÷ (CN¥112b - CN¥20b) (Based on the trailing twelve months to June 2024).

So, Ningbo Zhoushan Port has an ROCE of 5.2%. Even though it's in line with the industry average of 5.1%, it's still a low return by itself.

Check out our latest analysis for Ningbo Zhoushan Port

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ningbo Zhoushan Port's ROCE against it's prior returns. If you're interested in investigating Ningbo Zhoushan Port's past further, check out this free graph covering Ningbo Zhoushan Port's past earnings, revenue and cash flow.

So How Is Ningbo Zhoushan Port's ROCE Trending?

When we looked at the ROCE trend at Ningbo Zhoushan Port, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.2% from 7.2% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Ningbo Zhoushan Port has decreased its current liabilities to 18% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Ningbo Zhoushan Port's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Ningbo Zhoushan Port is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 12% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

One more thing to note, we've identified 1 warning sign with Ningbo Zhoushan Port and understanding this should be part of your investment process.

While Ningbo Zhoushan Port 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.