Returns On Capital Are Showing Encouraging Signs At COSCO SHIPPING International (Hong Kong) (HKG:517)

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, COSCO SHIPPING International (Hong Kong) (HKG:517) looks quite promising in regards to its trends of return on capital.

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. 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$228m ÷ (HK$9.2b - HK$865m) (Based on the trailing twelve months to June 2023).

Thus, 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 7.2%.

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

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

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 58% over the last five years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

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

To sum it up, COSCO SHIPPING International (Hong Kong) is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a solid 77% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

Like most companies, COSCO SHIPPING International (Hong Kong) does come with some risks, and we've found 1 warning sign that you should be aware of.

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. 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.