Be Wary Of Sinostone(Guangdong)Ltd (SZSE:001212) And Its Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Sinostone(Guangdong)Ltd (SZSE:001212), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Sinostone(Guangdong)Ltd, this is the formula:

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

0.016 = CN¥34m ÷ (CN¥2.3b - CN¥144m) (Based on the trailing twelve months to September 2024).

So, Sinostone(Guangdong)Ltd has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 5.2%.

Check out our latest analysis for Sinostone(Guangdong)Ltd

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'd like to look at how Sinostone(Guangdong)Ltd has performed in the past in other metrics, you can view this free graph of Sinostone(Guangdong)Ltd's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Sinostone(Guangdong)Ltd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 23%, but since then they've fallen to 1.6%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, Sinostone(Guangdong)Ltd has decreased its current liabilities to 6.3% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Sinostone(Guangdong)Ltd's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Sinostone(Guangdong)Ltd have fallen, meanwhile the business is employing more capital than it was five years ago. But investors must be expecting an improvement of sorts because over the last three yearsthe stock has delivered a respectable 25% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a final note, we found 2 warning signs for Sinostone(Guangdong)Ltd (1 is concerning) you should be aware of.

While Sinostone(Guangdong)Ltd 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.