COSCO SHIPPING Holdings (HKG:1919) Is Very Good At Capital Allocation

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Speaking of which, we noticed some great changes in COSCO SHIPPING Holdings' (HKG:1919) returns on capital, so let's have a look.

What Is 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. The formula for this calculation on COSCO SHIPPING Holdings is:

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

0.36 = CN¥128b ÷ (CN¥501b - CN¥144b) (Based on the trailing twelve months to March 2023).

Thus, COSCO SHIPPING Holdings has an ROCE of 36%. In absolute terms that's a great return and it's even better than the Shipping industry average of 15%.

See our latest analysis for COSCO SHIPPING Holdings

In the above chart we have measured COSCO SHIPPING Holdings' 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 Holdings.

What Can We Tell From COSCO SHIPPING Holdings' ROCE Trend?

Investors would be pleased with what's happening at COSCO SHIPPING Holdings. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 36%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 303%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

What We Can Learn From COSCO SHIPPING Holdings' ROCE

All in all, it's terrific to see that COSCO SHIPPING Holdings is reaping the rewards from prior investments and is growing its capital base. And a remarkable 426% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One final note, you should learn about the 2 warning signs we've spotted with COSCO SHIPPING Holdings (including 1 which shouldn't be ignored) .

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.