To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. However, after briefly looking over the numbers, we don't think COSCO SHIPPING Ports (HKG:1199) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for COSCO SHIPPING Ports:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.026 = US$263m ÷ (US$12b - US$1.7b) (Based on the trailing twelve months to March 2024).
Therefore, COSCO SHIPPING Ports has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Infrastructure industry average of 6.0%.
In the above chart we have measured COSCO SHIPPING Ports' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering COSCO SHIPPING Ports for free.
The Trend Of ROCE
There hasn't been much to report for COSCO SHIPPING Ports' returns and its level of capital employed because both metrics have been steady for the past five years. 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. With that in mind, unless investment picks up again in the future, we wouldn't expect COSCO SHIPPING Ports to be a multi-bagger going forward. With fewer investment opportunities, it makes sense that COSCO SHIPPING Ports has been paying out a decent 45% of its earnings to shareholders. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.
The Bottom Line On COSCO SHIPPING Ports' ROCE
We can conclude that in regards to COSCO SHIPPING Ports' returns on capital employed and the trends, there isn't much change to report on. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
COSCO SHIPPING Ports does have some risks though, and we've spotted 2 warning signs for COSCO SHIPPING Ports that you might be interested in.
While COSCO SHIPPING Ports isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.