Can China Container Terminal (TPE:2613) Continue To Grow Its Returns On Capital?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at China Container Terminal (TPE:2613) so let's look a bit deeper.

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. Analysts use this formula to calculate it for China Container Terminal:

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

0.018 = NT$178m ÷ (NT$11b - NT$1.5b) (Based on the trailing twelve months to September 2020).

So, China Container Terminal has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Infrastructure industry average of 4.7%.

See our latest analysis for China Container Terminal

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 want to delve into the historical earnings, revenue and cash flow of China Container Terminal, check out these free graphs here.

What Does the ROCE Trend For China Container Terminal Tell Us?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 1.8%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 100%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

What We Can Learn From China Container Terminal's ROCE

To sum it up, China Container Terminal has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with a respectable 88% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

China Container Terminal does come with some risks though, we found 5 warning signs in our investment analysis, and 2 of those are significant...

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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