Tianjin Port Development Holdings (HKG:3382) May Have Issues Allocating Its Capital

What underlying fundamental trends can indicate that a company might be in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, Tianjin Port Development Holdings (HKG:3382) we aren't filled with optimism, but let's investigate further.

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 Tianjin Port Development Holdings:

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 7.2%.

Check out our latest analysis for Tianjin Port Development Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Tianjin Port Development Holdings' ROCE against it's prior returns. If you'd like to look at how Tianjin Port Development Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

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

There is reason to be cautious about Tianjin Port Development Holdings, given the returns are trending downwards. To be more specific, the ROCE was 7.3% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Tianjin Port Development Holdings becoming one if things continue as they have.

What We Can Learn From Tianjin Port Development Holdings' ROCE

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 29% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to know some of the risks facing Tianjin Port Development Holdings we've found 3 warning signs (1 is potentially serious!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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