SinosoftLtd (SHSE:603927) May Have Issues Allocating Its Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at SinosoftLtd (SHSE:603927) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for SinosoftLtd:

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

0.16 = CN¥519m ÷ (CN¥6.8b - CN¥3.5b) (Based on the trailing twelve months to September 2024).

So, SinosoftLtd has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Software industry average of 2.5% it's much better.

See our latest analysis for SinosoftLtd

Above you can see how the current ROCE for SinosoftLtd 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 SinosoftLtd .

The Trend Of ROCE

On the surface, the trend of ROCE at SinosoftLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 16% from 24% five years ago. However it looks like SinosoftLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a separate but related note, it's important to know that SinosoftLtd has a current liabilities to total assets ratio of 52%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by SinosoftLtd's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 22% in the last five years. Therefore based on the analysis done in this article, we don't think SinosoftLtd has the makings of a multi-bagger.

On a separate note, we've found 1 warning sign for SinosoftLtd you'll probably want to know about.

While SinosoftLtd 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.