Is COSCO SHIPPING International (Hong Kong) (HKG:517) Headed For Trouble?

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. 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. Having said that, after a brief look, COSCO SHIPPING International (Hong Kong) (HKG:517) 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 COSCO SHIPPING International (Hong Kong):

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

0.013 = HK$108m ÷ (HK$9.6b - HK$1.4b) (Based on the trailing twelve months to June 2020).

Therefore, COSCO SHIPPING International (Hong Kong) has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the Infrastructure industry average of 5.6%.

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're interested in investigating COSCO SHIPPING International (Hong Kong)'s past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For COSCO SHIPPING International (Hong Kong) Tell Us?

In terms of COSCO SHIPPING International (Hong Kong)'s historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 2.3% 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. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on COSCO SHIPPING International (Hong Kong) becoming one if things continue as they have.

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

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Despite the concerning underlying trends, the stock has actually gained 2.4% over the last three years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for COSCO SHIPPING International (Hong Kong) (of which 1 shouldn't be ignored!) that you should know about.

While COSCO SHIPPING International (Hong Kong) 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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This article by Simply Wall St is general in nature. 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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