Sino ICT Holdings (HKG:365) Is Looking To Continue Growing Its Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Speaking of which, we noticed some great changes in Sino ICT Holdings' (HKG:365) returns on capital, so let's have a look.

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. Analysts use this formula to calculate it for Sino ICT Holdings:

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

0.083 = HK$30m ÷ (HK$1.0b - HK$689m) (Based on the trailing twelve months to June 2021).

Thus, Sino ICT Holdings has an ROCE of 8.3%. In absolute terms, that's a low return but it's around the Machinery industry average of 10.0%.

See our latest analysis for Sino ICT Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Sino ICT Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

It's great to see that Sino ICT Holdings has started to generate some pre-tax earnings from prior investments. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 8.3% on their capital employed. Additionally, the business is utilizing 46% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. This could potentially mean that the company is selling some of its assets.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 66% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

The Key Takeaway

In a nutshell, we're pleased to see that Sino ICT Holdings has been able to generate higher returns from less capital. And since the stock has fallen 69% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Like most companies, Sino ICT Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.