Sino Golf Holdings (HKG:361) Is Doing The Right Things To Multiply Its Share Price

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Sino Golf Holdings (HKG:361) looks quite promising in regards to its trends of return on capital.

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 Sino Golf Holdings, this is the formula:

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

0.01 = HK$3.3m ÷ (HK$558m - HK$231m) (Based on the trailing twelve months to December 2021).

Therefore, Sino Golf Holdings has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Leisure industry average of 3.6%.

Check out our latest analysis for Sino Golf Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sino Golf Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Sino Golf Holdings, check out these free graphs here.

How Are Returns Trending?

Like most people, we're pleased that Sino Golf Holdings is now generating some pretax earnings. While the business is profitable now, it used to be incurring losses on invested capital five years ago. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 23%. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 42% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line On Sino Golf Holdings' ROCE

From what we've seen above, Sino Golf Holdings has managed to increase it's returns on capital all the while reducing it's capital base. Although the company may be facing some issues elsewhere since the stock has plunged 90% in the last five years. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

Sino Golf Holdings does have some risks though, and we've spotted 2 warning signs for Sino Golf Holdings that you might be interested in.

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.