If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 Global Ports Investments (LON:GLPR) and its trend of ROCE, we really liked what we saw.
Understanding 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. To calculate this metric for Global Ports Investments, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.19 = US$227m ÷ (US$1.3b – US$56m) (Based on the trailing twelve months to June 2022).
Therefore, Global Ports Investments has an ROCE of 19%. In absolute terms, that’s a satisfactory return, but compared to the Infrastructure industry average of 8.4% it’s much better.
Check out our latest analysis for Global Ports Investments
Above you can see how the current ROCE for Global Ports Investments compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like, you can check out the forecasts from the analysts covering Global Ports Investments here for free.
What The Trend Of ROCE Can Tell Us
We’re pretty happy with how the ROCE has been trending at Global Ports Investments. We found that the returns on capital employed over the last five years have risen by 90%. That’s not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Interestingly, the business may be becoming more efficient because it’s applying 23% less capital than it was five years ago. Global Ports Investments may be selling some assets so it’s worth investigating if the business has plans for future investments to increase returns further still.
What We Can Learn From Global Ports Investments’ ROCE
In the end, Global Ports Investments has proven it’s capital allocation skills are good with those higher returns from less amount of capital. Given the stock has declined 67% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company’s current valuation metrics and future prospects seems fitting.
On a final note, we found 2 warning signs for Global Ports Investments (1 is potentially serious) you should be aware of.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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