Returns On Capital At Cintac (SNSE:CINTAC) Paint An Interesting Picture

There are a few key trends to look for if we want to identify the next multi-bagger. 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. In light of that, when we looked at Cintac (SNSE:CINTAC) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Cintac is:

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

0.065 = US$22m ÷ (US$610m - US$272m) (Based on the trailing twelve months to September 2020).

Thus, Cintac has an ROCE of 6.5%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 8.2%.

See our latest analysis for Cintac

Historical performance is a great place to start when researching a stock so above you can see the gauge for Cintac's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Cintac, check out these free graphs here.

How Are Returns Trending?

There are better returns on capital out there than what we're seeing at Cintac. The company has consistently earned 6.5% for the last five years, and the capital employed within the business has risen 64% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On a side note, Cintac's current liabilities are still rather high at 45% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

Long story short, while Cintac has been reinvesting its capital, the returns that it's generating haven't increased. Yet to long term shareholders the stock has gifted them an incredible 341% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Cintac (of which 1 can't be ignored!) that you should know about.

While Cintac may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. 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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