Some Investors May Be Worried About Sinostar Cable's (SZSE:300933) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Although, when we looked at Sinostar Cable (SZSE:300933), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Sinostar Cable, this is the formula:

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

0.056 = CN¥122m ÷ (CN¥4.1b - CN¥1.9b) (Based on the trailing twelve months to June 2024).

Thus, Sinostar Cable has an ROCE of 5.6%. Even though it's in line with the industry average of 5.9%, it's still a low return by itself.

See our latest analysis for Sinostar Cable

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Sinostar Cable.

What Does the ROCE Trend For Sinostar Cable Tell Us?

When we looked at the ROCE trend at Sinostar Cable, we didn't gain much confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 5.6%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

Another thing to note, Sinostar Cable has a high ratio of current liabilities to total assets of 47%. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Sinostar Cable is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 51% over the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Sinostar Cable does have some risks, we noticed 3 warning signs (and 2 which shouldn't be ignored) we think you should know about.

While Sinostar Cable isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.