What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at TangShan Port GroupLtd (SHSE:601000) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for TangShan Port GroupLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.09 = CN¥2.0b ÷ (CN¥24b - CN¥1.8b) (Based on the trailing twelve months to September 2023).
So, TangShan Port GroupLtd has an ROCE of 9.0%. On its own that's a low return, but compared to the average of 4.9% generated by the Infrastructure industry, it's much better.
See our latest analysis for TangShan Port GroupLtd
Above you can see how the current ROCE for TangShan Port GroupLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering TangShan Port GroupLtd here for free.
How Are Returns Trending?
Over the past five years, TangShan Port GroupLtd's ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if TangShan Port GroupLtd doesn't end up being a multi-bagger in a few years time. On top of that you'll notice that TangShan Port GroupLtd has been paying out a large portion (69%) of earnings in the form of dividends to shareholders. These mature businesses typically have reliable earnings and not many places to reinvest them, so the next best option is to put the earnings into shareholders pockets.
One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 7.8% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.
The Bottom Line
We can conclude that in regards to TangShan Port GroupLtd's returns on capital employed and the trends, there isn't much change to report on. Although the market must be expecting these trends to improve because the stock has gained 82% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
TangShan Port GroupLtd does have some risks though, and we've spotted 1 warning sign for TangShan Port GroupLtd that you might be interested in.
While TangShan Port GroupLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.