Returns On Capital At COSCO SHIPPING Development (HKG:2866) Have Hit The Brakes

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think COSCO SHIPPING Development (HKG:2866) 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)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for COSCO SHIPPING Development, this is the formula:

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

0.038 = CN¥3.4b ÷ (CN¥125b - CN¥37b) (Based on the trailing twelve months to March 2024).

So, COSCO SHIPPING Development has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 6.2%.

View our latest analysis for COSCO SHIPPING Development

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of COSCO SHIPPING Development.

What Can We Tell From COSCO SHIPPING Development's ROCE Trend?

Over the past five years, COSCO SHIPPING Development's ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if COSCO SHIPPING Development doesn't end up being a multi-bagger in a few years time.

Our Take On COSCO SHIPPING Development's ROCE

In a nutshell, COSCO SHIPPING Development has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has gained an impressive 92% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing: We've identified 2 warning signs with COSCO SHIPPING Development (at least 1 which is a bit unpleasant) , and understanding them would certainly be useful.

While COSCO SHIPPING Development 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.