Hebei Sinopack Electronic TechnologyLtd (SZSE:003031) May Have Issues Allocating Its Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. 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 Hebei Sinopack Electronic TechnologyLtd (SZSE:003031), it didn't seem to tick all of these boxes.

Understanding 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 Hebei Sinopack Electronic TechnologyLtd, this is the formula:

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

0.085 = CN¥539m ÷ (CN¥7.7b - CN¥1.4b) (Based on the trailing twelve months to June 2024).

So, Hebei Sinopack Electronic TechnologyLtd has an ROCE of 8.5%. On its own that's a low return, but compared to the average of 5.8% generated by the Electronic industry, it's much better.

See our latest analysis for Hebei Sinopack Electronic TechnologyLtd

Above you can see how the current ROCE for Hebei Sinopack Electronic TechnologyLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Hebei Sinopack Electronic TechnologyLtd .

How Are Returns Trending?

We weren't thrilled with the trend because Hebei Sinopack Electronic TechnologyLtd's ROCE has reduced by 21% over the last five years, while the business employed 1,012% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Hebei Sinopack Electronic TechnologyLtd's earnings and if they change as a result from the capital raise.

The Key Takeaway

We're a bit apprehensive about Hebei Sinopack Electronic TechnologyLtd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. But investors must be expecting an improvement of sorts because over the last three yearsthe stock has delivered a respectable 38% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a final note, we found 2 warning signs for Hebei Sinopack Electronic TechnologyLtd (1 doesn't sit too well with us) you should be aware of.

While Hebei Sinopack Electronic TechnologyLtd 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.