If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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 COSCO SHIPPING Specialized CarriersLtd (SHSE:600428) so let's look a bit deeper.
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 COSCO SHIPPING Specialized CarriersLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.073 = CN¥1.5b ÷ (CN¥27b - CN¥7.0b) (Based on the trailing twelve months to June 2023).
Therefore, COSCO SHIPPING Specialized CarriersLtd has an ROCE of 7.3%. Ultimately, that's a low return and it under-performs the Shipping industry average of 9.9%.
See our latest analysis for COSCO SHIPPING Specialized CarriersLtd
In the above chart we have measured COSCO SHIPPING Specialized CarriersLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering COSCO SHIPPING Specialized CarriersLtd here for free.
What The Trend Of ROCE Can Tell Us
COSCO SHIPPING Specialized CarriersLtd is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 124% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
The Bottom Line
To bring it all together, COSCO SHIPPING Specialized CarriersLtd has done well to increase the returns it's generating from its capital employed. And with a respectable 66% 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.
If you'd like to know about the risks facing COSCO SHIPPING Specialized CarriersLtd, we've discovered 2 warning signs that you should be aware of.
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. 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.