Here's What's Concerning About Sinostone(Guangdong)Ltd's (SZSE:001212) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Sinostone(Guangdong)Ltd (SZSE:001212) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the 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)

0.026 = CN¥56m ÷ (CN¥2.3b - CN¥155m) (Based on the trailing twelve months to March 2024).

Thus, Sinostone(Guangdong)Ltd has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Basic Materials industry average of 6.1%.

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.

So How Is Sinostone(Guangdong)Ltd's ROCE Trending?

In terms of Sinostone(Guangdong)Ltd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 22%, but since then they've fallen to 2.6%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Sinostone(Guangdong)Ltd has decreased its current liabilities to 6.8% 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.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Sinostone(Guangdong)Ltd's reinvestment in its own business, we're aware that returns are shrinking. Additionally, the stock's total return to shareholders over the last year has been flat, which isn't too surprising. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you'd like to know about the risks facing Sinostone(Guangdong)Ltd, we've discovered 1 warning sign that 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.

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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.