There are a few key trends to look for if we want to identify the next multi-bagger. 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 Chien Shing Harbour ServiceLtd (TPE:8367) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What is it?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Chien Shing Harbour ServiceLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.056 = NT$325m ÷ (NT$7.2b - NT$1.4b) (Based on the trailing twelve months to September 2020).
So, Chien Shing Harbour ServiceLtd has an ROCE of 5.6%. Ultimately, that's a low return and it under-performs the Logistics industry average of 11%.
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'd like to look at how Chien Shing Harbour ServiceLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is Chien Shing Harbour ServiceLtd's ROCE Trending?
On the surface, the trend of ROCE at Chien Shing Harbour ServiceLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.6% from 7.7% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
The Bottom Line On Chien Shing Harbour ServiceLtd's ROCE
While returns have fallen for Chien Shing Harbour ServiceLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Furthermore the stock has climbed 25% over the last three years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.
One more thing: We've identified 4 warning signs with Chien Shing Harbour ServiceLtd (at least 1 which is a bit unpleasant) , and understanding these would certainly be useful.
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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