If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Speaking of which, we noticed some great changes in Liaoning Port's (HKG:2880) returns on capital, so let's have a look.

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 Liaoning Port, this is the formula:

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

0.044 = CN¥2.2b ÷ (CN¥55b - CN¥4.6b) (Based on the trailing twelve months to June 2024).

So, Liaoning Port has an ROCE of 4.4%. On its own, that's a low figure but it's around the 5.2% average generated by the Infrastructure industry.

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 , check out these free graphs detailing revenue and cash flow performance of Liaoning Port.

What Can We Tell From Liaoning Port's ROCE Trend?

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 4.4%. The amount of capital employed has increased too, by 54%. So we're very much inspired by what we're seeing at Liaoning Port thanks to its ability to profitably reinvest capital.

What We Can Learn From Liaoning Port's ROCE

To sum it up, Liaoning Port has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And since the stock has fallen 30% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

While Liaoning Port looks impressive, no company is worth an infinite price. The intrinsic value infographic for 2880 helps visualize whether it is currently trading for a fair price.

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.