Should COSCO SHIPPING Ports Limited’s (HKG:1199) Weak Investment Returns Worry You?

Simply Wall St

Sun, Apr 7, 2019, 6:06 PM

Today we are going to look at COSCO SHIPPING Ports Limited (HKG:1199) to see whether it might be an attractive investment prospect. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'

So, How Do We Calculate ROCE?

Analysts use this formula to calculate return on capital employed:

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

Or for COSCO SHIPPING Ports:

0.025 = US$204m ÷ (US$9.0b - US$781m) (Based on the trailing twelve months to December 2018.)

So, COSCO SHIPPING Ports has an ROCE of 2.5%.

View our latest analysis for COSCO SHIPPING Ports

Is COSCO SHIPPING Ports's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. In this analysis, COSCO SHIPPING Ports's ROCE appears meaningfully below the 8.1% average reported by the Infrastructure industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Independently of how COSCO SHIPPING Ports compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.0% available in government bonds. Readers may wish to look for more rewarding investments.

As we can see, COSCO SHIPPING Ports currently has an ROCE of 2.5% compared to its ROCE 3 years ago, which was 1.6%. This makes us think the business might be improving.

SEHK:1199 Past Revenue and Net Income, April 8th 2019

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for COSCO SHIPPING Ports.