What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Hutchison Port Holdings Trust (SGX:NS8U) and its trend of ROCE, we really liked what we saw.
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 Hutchison Port Holdings Trust is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.055 = HK$4.3b ÷ (HK$89b - HK$11b) (Based on the trailing twelve months to December 2022).
Therefore, Hutchison Port Holdings Trust has an ROCE of 5.5%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.2%.
View our latest analysis for Hutchison Port Holdings Trust
In the above chart we have measured Hutchison Port Holdings Trust'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 Hutchison Port Holdings Trust here for free.
What Does the ROCE Trend For Hutchison Port Holdings Trust Tell Us?
We're pretty happy with how the ROCE has been trending at Hutchison Port Holdings Trust. The data shows that returns on capital have increased by 53% over the trailing five years. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Hutchison Port Holdings Trust appears to been achieving more with less, since the business is using 22% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.
Our Take On Hutchison Port Holdings Trust's ROCE
In the end, Hutchison Port Holdings Trust has proven it's capital allocation skills are good with those higher returns from less amount of capital. Considering the stock has delivered 3.1% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
If you'd like to know more about Hutchison Port Holdings Trust, we've spotted 3 warning signs, and 1 of them is significant.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.