Investors Could Be Concerned With Tianjin Port Development Holdings' (HKG:3382) Returns On Capital

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after glancing at the trends within Tianjin Port Development Holdings (HKG:3382), we weren't too hopeful.

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 Tianjin Port Development Holdings is:

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

0.043 = HK$1.6b ÷ (HK$48b - HK$11b) (Based on the trailing twelve months to December 2020).

So, Tianjin Port Development Holdings has an ROCE of 4.3%. Ultimately, that's a low return and it under-performs the Infrastructure industry average of 7.7%.

Check out our latest analysis for Tianjin Port Development Holdings

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, revenue and cash flow of Tianjin Port Development Holdings, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

In terms of Tianjin Port Development Holdings' historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 7.3% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 Tianjin Port Development Holdings to turn into a multi-bagger.

Our Take On Tianjin Port Development Holdings' ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. It should come as no surprise then that the stock has fallen 29% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Tianjin Port Development Holdings does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is significant...

While Tianjin Port Development Holdings isn't earning the highest return, check out this free list of companies that are 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.
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