These Return Metrics Don't Make COSCO SHIPPING Energy Transportation (HKG:1138) Look Too Strong

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. And from a first read, things don't look too good at COSCO SHIPPING Energy Transportation (HKG:1138), so let's see why.

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. The formula for this calculation on COSCO SHIPPING Energy Transportation is:

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

0.013 = CN¥723m ÷ (CN¥65b - CN¥9.3b) (Based on the trailing twelve months to September 2021).

Thus, COSCO SHIPPING Energy Transportation has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 8.2%.

View our latest analysis for COSCO SHIPPING Energy Transportation

Above you can see how the current ROCE for COSCO SHIPPING Energy Transportation compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at COSCO SHIPPING Energy Transportation. About five years ago, returns on capital were 5.7%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect COSCO SHIPPING Energy Transportation to turn into a multi-bagger.

Our Take On COSCO SHIPPING Energy Transportation's ROCE

In summary, it's unfortunate that COSCO SHIPPING Energy Transportation is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 19% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

COSCO SHIPPING Energy Transportation does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

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.

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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.