What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. So on that note, China Merchants Energy Shipping (SHSE:601872) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

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 China Merchants Energy Shipping, this is the formula:

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

0.11 = CN¥5.8b ÷ (CN¥64b - CN¥12b) (Based on the trailing twelve months to March 2024).

Thus, China Merchants Energy Shipping has an ROCE of 11%. That's a pretty standard return and it's in line with the industry average of 11%.

In the above chart we have measured China Merchants Energy Shipping's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for China Merchants Energy Shipping .

What Can We Tell From China Merchants Energy Shipping's ROCE Trend?

The trends we've noticed at China Merchants Energy Shipping are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 11%. The amount of capital employed has increased too, by 42%. So we're very much inspired by what we're seeing at China Merchants Energy Shipping thanks to its ability to profitably reinvest capital.

On a related note, the company's ratio of current liabilities to total assets has decreased to 19%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

What We Can Learn From China Merchants Energy Shipping's ROCE

All in all, it's terrific to see that China Merchants Energy Shipping is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 156% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if China Merchants Energy Shipping can keep these trends up, it could have a bright future ahead.

On a final note, we've found 1 warning sign for China Merchants Energy Shipping that we think you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com