COSCO SHIPPING Development's (HKG:2866) Returns On Capital Are Heading Higher

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, COSCO SHIPPING Development (HKG:2866) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on COSCO SHIPPING Development is:

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

0.054 = CN¥4.8b ÷ (CN¥120b - CN¥31b) (Based on the trailing twelve months to March 2023).

Thus, COSCO SHIPPING Development has an ROCE of 5.4%. Even though it's in line with the industry average of 4.9%, it's still a low return by itself.

Check out our latest analysis for COSCO SHIPPING Development

Historical performance is a great place to start when researching a stock so above you can see the gauge for COSCO SHIPPING Development's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of COSCO SHIPPING Development, check out these free graphs here.

The Trend Of ROCE

COSCO SHIPPING Development's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 55% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 26%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

In Conclusion...

To sum it up, COSCO SHIPPING Development is collecting higher returns from the same amount of capital, and that's impressive. Considering the stock has delivered 9.0% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.

If you'd like to know more about COSCO SHIPPING Development, we've spotted 3 warning signs, and 1 of them doesn't sit too well with us.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.