If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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 Ningbo Ocean Shipping (SHSE:601022), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Ningbo Ocean Shipping is:

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

0.10 = CN¥611m ÷ (CN¥7.4b - CN¥1.5b) (Based on the trailing twelve months to September 2023).

Thus, Ningbo Ocean Shipping has an ROCE of 10%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Shipping industry average of 9.0%.

See our latest analysis for Ningbo Ocean Shipping

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ningbo Ocean Shipping's ROCE against it's prior returns. If you're interested in investigating Ningbo Ocean Shipping's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Ningbo Ocean Shipping's ROCE Trending?

When we looked at the ROCE trend at Ningbo Ocean Shipping, we didn't gain much confidence. Over the last four years, returns on capital have decreased to 10% from 18% four years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Ningbo Ocean Shipping has decreased its current liabilities to 20% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Ningbo Ocean Shipping's reinvestment in its own business, we're aware that returns are shrinking. And in the last year, the stock has given away 12% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a final note, we've found 2 warning signs for Ningbo Ocean Shipping that we think you should be aware of.

While Ningbo Ocean Shipping 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.