Some Investors May Be Worried About Xiamen Port Development's (SZSE:000905) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Although, when we looked at Xiamen Port Development (SZSE:000905), it didn't seem to tick all of these boxes.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Xiamen Port Development:

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

0.044 = CN¥344m ÷ (CN¥14b - CN¥5.8b) (Based on the trailing twelve months to September 2024).

Therefore, Xiamen Port Development has an ROCE of 4.4%. On its own, that's a low figure but it's around the 4.9% average generated by the Infrastructure industry.

See our latest analysis for Xiamen Port Development

Historical performance is a great place to start when researching a stock so above you can see the gauge for Xiamen Port Development's ROCE against it's prior returns. If you'd like to look at how Xiamen Port Development has performed in the past in other metrics, you can view this free graph of Xiamen Port Development's past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Xiamen Port Development, we didn't gain much confidence. Around five years ago the returns on capital were 5.7%, but since then they've fallen to 4.4%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Xiamen Port Development's current liabilities are still rather high at 43% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Xiamen Port Development's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Xiamen Port Development is reinvesting for growth and has higher sales as a result. However, total returns to shareholders over the last five years have been flat, which could indicate these growth trends potentially aren't accounted for yet by investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Xiamen Port Development (of which 1 is significant!) that you should know about.

While Xiamen Port Development 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.