Capital Allocation Trends At Sinotruk (Hong Kong) (HKG:3808) Aren't Ideal

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after investigating Sinotruk (Hong Kong) (HKG:3808), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. To calculate this metric for Sinotruk (Hong Kong), this is the formula:

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

0.073 = CN¥3.4b ÷ (CN¥112b - CN¥66b) (Based on the trailing twelve months to June 2023).

So, Sinotruk (Hong Kong) has an ROCE of 7.3%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.4%.

View our latest analysis for Sinotruk (Hong Kong)

In the above chart we have measured Sinotruk (Hong Kong)'s prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Sinotruk (Hong Kong) here for free.

So How Is Sinotruk (Hong Kong)'s ROCE Trending?

On the surface, the trend of ROCE at Sinotruk (Hong Kong) doesn't inspire confidence. Over the last five years, returns on capital have decreased to 7.3% from 20% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a separate but related note, it's important to know that Sinotruk (Hong Kong) has a current liabilities to total assets ratio of 59%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

While returns have fallen for Sinotruk (Hong Kong) in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 59% to shareholders over the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Sinotruk (Hong Kong) could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

While Sinotruk (Hong Kong) 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.