Should You Be Worried About Chinese Maritime Transport's (TPE:2612) Returns On Capital?

What financial metrics can indicate to us that a company is maturing or even in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after glancing at the trends within Chinese Maritime Transport (TPE:2612), 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. To calculate this metric for Chinese Maritime Transport, this is the formula:

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

0.013 = NT$210m ÷ (NT$20b - NT$3.5b) (Based on the trailing twelve months to September 2020).

Therefore, Chinese Maritime Transport has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the Shipping industry average of 3.5%.

See our latest analysis for Chinese Maritime Transport

In the above chart we have measured Chinese Maritime Transport's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Chinese Maritime Transport's ROCE Trend?

We are a bit worried about the trend of returns on capital at Chinese Maritime Transport. About five years ago, returns on capital were 3.1%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 Chinese Maritime Transport becoming one if things continue as they have.

The Bottom Line

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 75% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Chinese Maritime Transport does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is potentially serious...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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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