COSCO SHIPPING International (Hong Kong)'s (HKG:517) Returns On Capital Are Heading Higher

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So on that note, COSCO SHIPPING International (Hong Kong) (HKG:517) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on COSCO SHIPPING International (Hong Kong) is:

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

0.027 = HK$226m ÷ (HK$9.6b - HK$1.2b) (Based on the trailing twelve months to June 2022).

Therefore, COSCO SHIPPING International (Hong Kong) has an ROCE of 2.7%. In absolute terms, that's a low return and it also under-performs the Infrastructure industry average of 5.5%.

View our latest analysis for COSCO SHIPPING International (Hong Kong)

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

So How Is COSCO SHIPPING International (Hong Kong)'s ROCE Trending?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 92% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

What We Can Learn From COSCO SHIPPING International (Hong Kong)'s ROCE

As discussed above, COSCO SHIPPING International (Hong Kong) appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has only returned 2.0% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

One more thing, we've spotted 2 warning signs facing COSCO SHIPPING International (Hong Kong) that you might find interesting.

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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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.