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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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Hutchison Port Holdings Trust (SGX:NS8U) and its trend of ROCE, we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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$3.6b ÷ (HK$81b - HK$15b) (Based on the trailing twelve months to June 2024).
So, Hutchison Port Holdings Trust has an ROCE of 5.5%. In absolute terms, that's a low return but it's around the Infrastructure industry average of 6.3%.
See 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're interested, you can view the analysts predictions in our free analyst report for Hutchison Port Holdings Trust .
What The Trend Of ROCE Can Tell Us
Hutchison Port Holdings Trust has not disappointed in regards to ROCE growth. The data shows that returns on capital have increased by 30% over the trailing five years. The company is now earning HK$0.05 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 21% less than it was five years ago, which can be indicative of a business that's improving its efficiency. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.
In Conclusion...
In summary, it's great to see that Hutchison Port Holdings Trust has been able to turn things around and earn higher returns on lower amounts of capital. Since the stock has only returned 29% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
Hutchison Port Holdings Trust does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit unpleasant...