Tianjin Port Development Holdings (HKG:3382) Is Finding It Tricky To Allocate Its Capital

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at Tianjin Port Development Holdings (HKG:3382), so let's see why.

What Is 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. Analysts use this formula to calculate it for Tianjin Port Development Holdings:

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

0.041 = HK$1.4b ÷ (HK$44b - HK$9.9b) (Based on the trailing twelve months to June 2022).

Therefore, Tianjin Port Development Holdings has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Infrastructure industry average of 5.5%.

See 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 Can We Tell From Tianjin Port Development Holdings' ROCE Trend?

In terms of Tianjin Port Development Holdings' historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 6.7% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Tianjin Port Development Holdings to turn into a multi-bagger.

In Conclusion...

In summary, it's unfortunate that Tianjin Port Development Holdings is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 49% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing to note, we've identified 2 warning signs with Tianjin Port Development Holdings and understanding these should be part of your investment process.

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.