To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at the ROCE trend of Hainan Strait ShippingLtd (SZSE:002320) we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
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 Hainan Strait ShippingLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.22 = CN¥1.5b ÷ (CN¥7.7b - CN¥927m) (Based on the trailing twelve months to September 2023).
Therefore, Hainan Strait ShippingLtd has an ROCE of 22%. That's a fantastic return and not only that, it outpaces the average of 9.0% earned by companies in a similar industry.
Check out our latest analysis for Hainan Strait ShippingLtd
Historical performance is a great place to start when researching a stock so above you can see the gauge for Hainan Strait ShippingLtd's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Hainan Strait ShippingLtd, check out these free graphs here.
The Trend Of ROCE
The trends we've noticed at Hainan Strait ShippingLtd are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 22%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 83%. So we're very much inspired by what we're seeing at Hainan Strait ShippingLtd thanks to its ability to profitably reinvest capital.
The Bottom Line On Hainan Strait ShippingLtd's ROCE
In summary, it's great to see that Hainan Strait ShippingLtd can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 51% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
One more thing, we've spotted 1 warning sign facing Hainan Strait ShippingLtd that you might find interesting.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high 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.