Capital Allocation Trends At Rizhao Port Jurong (HKG:6117) Aren't Ideal

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. In light of that, when we looked at Rizhao Port Jurong (HKG:6117) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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 Rizhao Port Jurong is:

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

0.093 = CN¥280m ÷ (CN¥3.3b - CN¥251m) (Based on the trailing twelve months to June 2023).

Thus, Rizhao Port Jurong has an ROCE of 9.3%. On its own that's a low return, but compared to the average of 7.2% generated by the Infrastructure industry, it's much better.

Check out our latest analysis for Rizhao Port Jurong

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

So How Is Rizhao Port Jurong's ROCE Trending?

In terms of Rizhao Port Jurong's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 13% over the last five years. However it looks like Rizhao Port Jurong might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Rizhao Port Jurong has done well to pay down its current liabilities to 7.7% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Rizhao Port Jurong's ROCE

In summary, Rizhao Port Jurong is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly, the stock has only gained 1.8% over the last three years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

If you want to continue researching Rizhao Port Jurong, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.