Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. 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 Ningbo Ocean Shipping (SHSE:601022) 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?

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. To calculate this metric for Ningbo Ocean Shipping, this is the formula:

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

0.095 = CN¥590m ÷ (CN¥7.6b - CN¥1.4b) (Based on the trailing twelve months to March 2024).

Therefore, Ningbo Ocean Shipping has an ROCE of 9.5%. On its own that's a low return, but compared to the average of 7.8% generated by the Shipping industry, it's much better.

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 Ningbo Ocean Shipping has performed in the past in other metrics, you can view this free graph of Ningbo Ocean Shipping's past earnings, revenue and cash flow.

What Can We Tell From Ningbo Ocean Shipping's ROCE Trend?

In terms of Ningbo Ocean Shipping's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 9.5% from 18% five years ago. However it looks like Ningbo Ocean Shipping 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.

On a related note, Ningbo Ocean Shipping has decreased its current liabilities to 18% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

To conclude, we've found that Ningbo Ocean Shipping is reinvesting in the business, but returns have been falling. And in the last year, the stock has given away 18% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Ningbo Ocean Shipping has the makings of a multi-bagger.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Ningbo Ocean Shipping (of which 1 is concerning!) that you should know about.

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.

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