There Are Reasons To Feel Uneasy About Sinomine Resource Group's (SZSE:002738) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Sinomine Resource Group (SZSE:002738), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Sinomine Resource Group, this is the formula:

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

0.057 = CN¥774m ÷ (CN¥16b - CN¥2.6b) (Based on the trailing twelve months to September 2024).

Therefore, Sinomine Resource Group has an ROCE of 5.7%. On its own, that's a low figure but it's around the 6.8% average generated by the Metals and Mining industry.

See our latest analysis for Sinomine Resource Group

Above you can see how the current ROCE for Sinomine Resource Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Sinomine Resource Group .

The Trend Of ROCE

In terms of Sinomine Resource Group's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 5.7% from 7.3% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

What We Can Learn From Sinomine Resource Group's ROCE

In summary, we're somewhat concerned by Sinomine Resource Group's diminishing returns on increasing amounts of capital. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 353%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you'd like to know more about Sinomine Resource Group, we've spotted 3 warning signs, and 2 of them are potentially serious.

While Sinomine Resource Group 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.