China Container Terminal (TPE:2613) Has Some Way To Go To Become A Multi-Bagger

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating China Container Terminal (TPE:2613), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for China Container Terminal, this is the formula:

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

0.018 = NT$178m ÷ (NT$11b - NT$1.3b) (Based on the trailing twelve months to December 2020).

Thus, China Container Terminal has an ROCE of 1.8%. Ultimately, that's a low return and it under-performs the Infrastructure industry average of 5.0%.

Check out our latest analysis for China Container Terminal

Historical performance is a great place to start when researching a stock so above you can see the gauge for China Container Terminal's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of China Container Terminal, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

In terms of China Container Terminal's historical ROCE trend, it doesn't exactly demand attention. The company has employed 88% more capital in the last five years, and the returns on that capital have remained stable at 1.8%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Key Takeaway

In conclusion, China Container Terminal has been investing more capital into the business, but returns on that capital haven't increased. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 119% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing: We've identified 4 warning signs with China Container Terminal (at least 2 which shouldn't be ignored) , and understanding them would certainly be useful.

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. 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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