There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at China Merchants Port Holdings (HKG:144) so let's look a bit deeper.
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. Analysts use this formula to calculate it for China Merchants Port Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.025 = HK$3.9b ÷ (HK$171b - HK$18b) (Based on the trailing twelve months to June 2024).
Thus, China Merchants Port Holdings has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Infrastructure industry average of 5.2%.
View our latest analysis for China Merchants Port Holdings
In the above chart we have measured China Merchants Port Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for China Merchants Port Holdings .
So How Is China Merchants Port Holdings' ROCE Trending?
While there are companies with higher returns on capital out there, we still find the trend at China Merchants Port Holdings promising. The figures show that over the last five years, ROCE has grown 56% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
In Conclusion...
In summary, we're delighted to see that China Merchants Port Holdings has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with a respectable 40% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if China Merchants Port Holdings can keep these trends up, it could have a bright future ahead.
Like most companies, China Merchants Port Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.
While China Merchants Port Holdings 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.