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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at China Merchants Port Group (SZSE:001872), it didn't seem to tick all of these boxes.

What Is 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. The formula for this calculation on China Merchants Port Group is:

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

0.024 = CN¥4.2b ÷ (CN¥199b - CN¥26b) (Based on the trailing twelve months to September 2023).

Therefore, China Merchants Port Group has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Infrastructure industry average of 4.9%.

Check out our latest analysis for China Merchants Port Group

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'd like to look at how China Merchants Port Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is China Merchants Port Group's ROCE Trending?

On the surface, the trend of ROCE at China Merchants Port Group doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.4% from 55% five years ago. However it looks like China Merchants Port Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On China Merchants Port Group's ROCE

To conclude, we've found that China Merchants Port Group is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 21% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

While China Merchants Port Group doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

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.

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.