Sinostone(Guangdong)Ltd (SZSE:001212) Might Be Having Difficulty Using Its Capital Effectively

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Sinostone(Guangdong)Ltd (SZSE:001212), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

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)

0.038 = CN¥78m ÷ (CN¥2.2b - CN¥147m) (Based on the trailing twelve months to September 2023).

Therefore, Sinostone(Guangdong)Ltd has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Basic Materials industry average of 6.1%.

View our latest analysis for Sinostone(Guangdong)Ltd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sinostone(Guangdong)Ltd's ROCE against it's prior returns. If you're interested in investigating Sinostone(Guangdong)Ltd's past further, check out this free graph covering 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. To be more specific, ROCE has fallen from 23% over the last five years. 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Sinostone(Guangdong)Ltd has decreased its current liabilities to 6.6% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

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

To conclude, we've found that Sinostone(Guangdong)Ltd is reinvesting in the business, but returns have been falling. Since the stock has declined 14% over the last year, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Sinostone(Guangdong)Ltd (of which 2 can't be ignored!) that you should know about.

While Sinostone(Guangdong)Ltd 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. 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.