Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Qinhuangdao Port (HKG:3369), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
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. The formula for this calculation on Qinhuangdao Port is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.067 = CN¥1.7b ÷ (CN¥28b - CN¥3.0b) (Based on the trailing twelve months to March 2024).
So, Qinhuangdao Port has an ROCE of 6.7%. On its own, that's a low figure but it's around the 6.0% average generated by the Infrastructure industry.
View our latest analysis for Qinhuangdao Port
In the above chart we have measured Qinhuangdao Port's 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 Qinhuangdao Port for free.
How Are Returns Trending?
Things have been pretty stable at Qinhuangdao Port, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if Qinhuangdao Port doesn't end up being a multi-bagger in a few years time.
Our Take On Qinhuangdao Port's ROCE
In summary, Qinhuangdao Port isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Although the market must be expecting these trends to improve because the stock has gained 66% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
One more thing, we've spotted 1 warning sign facing Qinhuangdao Port that you might find interesting.
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.
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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