Should You Be Worried About Tianjin Port Development Holdings' (HKG:3382) Returns On Capital?

What underlying fundamental trends can indicate that a company might be in decline? 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. 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. On that note, looking into Tianjin Port Development Holdings (HKG:3382), we weren't too upbeat about how things were going.

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. 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)

0.048 = HK$1.6b ÷ (HK$43b - HK$9.5b) (Based on the trailing twelve months to June 2020).

So, Tianjin Port Development Holdings has an ROCE of 4.8%. On its own, that's a low figure but it's around the 5.6% average generated by the Infrastructure industry.

View 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 Does the ROCE Trend For Tianjin Port Development Holdings Tell Us?

In terms of Tianjin Port Development Holdings' historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 7.0% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Tianjin Port Development Holdings to turn into a multi-bagger.

In Conclusion...

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 38% 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 2 of those are a bit concerning...

While Tianjin Port Development Holdings 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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