The Returns On Capital At Sinotruk (Hong Kong) (HKG:3808) Don't Inspire Confidence

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Sinotruk (Hong Kong) (HKG:3808) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Sinotruk (Hong Kong), this is the formula:

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

0.038 = CN¥1.6b ÷ (CN¥101b - CN¥58b) (Based on the trailing twelve months to June 2022).

Thus, Sinotruk (Hong Kong) has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 6.9%.

Check out 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

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

In terms of Sinotruk (Hong Kong)'s historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 3.8% from 10% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a separate but related note, it's important to know that Sinotruk (Hong Kong) has a current liabilities to total assets ratio of 57%, 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Sinotruk (Hong Kong)'s ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Sinotruk (Hong Kong) have fallen, meanwhile the business is employing more capital than it was five years ago. Long term shareholders who've owned the stock over the last five years have experienced a 11% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Like most companies, Sinotruk (Hong Kong) does come with some risks, and we've found 3 warning signs that you should be aware of.

While Sinotruk (Hong Kong) 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.