Sinoma Science & TechnologyLtd (SZSE:002080) Might Be Having Difficulty Using Its Capital Effectively

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. However, after investigating Sinoma Science & TechnologyLtd (SZSE:002080), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Sinoma Science & TechnologyLtd is:

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

0.062 = CN¥2.4b ÷ (CN¥58b - CN¥19b) (Based on the trailing twelve months to March 2024).

Thus, Sinoma Science & TechnologyLtd has an ROCE of 6.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.6%.

See our latest analysis for Sinoma Science & TechnologyLtd

In the above chart we have measured Sinoma Science & TechnologyLtd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Sinoma Science & TechnologyLtd .

What Does the ROCE Trend For Sinoma Science & TechnologyLtd Tell Us?

On the surface, the trend of ROCE at Sinoma Science & TechnologyLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.2% from 11% five years ago. 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.

What We Can Learn From Sinoma Science & TechnologyLtd's ROCE

To conclude, we've found that Sinoma Science & TechnologyLtd is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 8.0% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

One more thing to note, we've identified 4 warning signs with Sinoma Science & TechnologyLtd and understanding them should be part of your investment process.

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.