Investors Will Want COSCO SHIPPING Energy Transportation's (HKG:1138) Growth In ROCE To Persist

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at COSCO SHIPPING Energy Transportation (HKG:1138) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

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 COSCO SHIPPING Energy Transportation:

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

0.066 = CN¥3.9b ÷ (CN¥69b - CN¥10b) (Based on the trailing twelve months to March 2023).

Thus, COSCO SHIPPING Energy Transportation has an ROCE of 6.6%. Even though it's in line with the industry average of 7.0%, it's still a low return by itself.

See our latest analysis for COSCO SHIPPING Energy Transportation

In the above chart we have measured COSCO SHIPPING Energy Transportation's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

SWOT Analysis for COSCO SHIPPING Energy Transportation

What The Trend Of ROCE Can Tell Us

COSCO SHIPPING Energy Transportation is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 235% over the last five years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

In Conclusion...

In summary, we're delighted to see that COSCO SHIPPING Energy Transportation has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a solid 63% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Like most companies, COSCO SHIPPING Energy Transportation does come with some risks, and we've found 1 warning sign that you should be aware of.

While COSCO SHIPPING Energy Transportation 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.