Is This A Sign of Things To Come At COSCO SHIPPING International (Hong Kong) (HKG:517)?

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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after glancing at the trends within COSCO SHIPPING International (Hong Kong) (HKG:517), we weren't too hopeful.

Understanding 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 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).

Thus, COSCO SHIPPING International (Hong Kong) has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Infrastructure industry average of 5.7%.

Check out 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 want to delve into the historical earnings, revenue and cash flow of COSCO SHIPPING International (Hong Kong), check out these free graphs here.

What Can We Tell From COSCO SHIPPING International (Hong Kong)'s ROCE Trend?

In terms of COSCO SHIPPING International (Hong Kong)'s historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 2.3%, however they're now substantially lower than that as we saw above. 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. 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.

The Bottom Line

In summary, it's unfortunate that COSCO SHIPPING International (Hong Kong) is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 17% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing: We've identified 2 warning signs with COSCO SHIPPING International (Hong Kong) (at least 1 which makes us a bit uncomfortable) , and understanding them would certainly be useful.

While COSCO SHIPPING International (Hong Kong) 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. 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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