COSCO SHIPPING Ports (HKG:1199) Could Be Struggling To Allocate Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Although, when we looked at COSCO SHIPPING Ports (HKG:1199), it didn't seem to tick all of these boxes.

Understanding 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. Analysts use this formula to calculate it for COSCO SHIPPING Ports:

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

0.011 = US$109m ÷ (US$11b - US$1.1b) (Based on the trailing twelve months to September 2021).

Therefore, COSCO SHIPPING Ports has an ROCE of 1.1%. Ultimately, that's a low return and it under-performs the Infrastructure industry average of 8.3%.

Check out our latest analysis for COSCO SHIPPING Ports

In the above chart we have measured COSCO SHIPPING Ports' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for COSCO SHIPPING Ports.

What Does the ROCE Trend For COSCO SHIPPING Ports Tell Us?

In terms of COSCO SHIPPING Ports' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 3.4%, but since then they've fallen to 1.1%. 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.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for COSCO SHIPPING Ports. In light of this, the stock has only gained 7.8% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

If you want to continue researching COSCO SHIPPING Ports, you might be interested to know about the 2 warning signs that our analysis has discovered.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.