We Like These Underlying Return On Capital Trends At Sino Golf Holdings (HKG:361)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Sino Golf Holdings (HKG:361) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Sino Golf Holdings:

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

0.037 = HK$12m ÷ (HK$561m - HK$241m) (Based on the trailing twelve months to June 2022).

Thus, Sino Golf Holdings has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Leisure industry average of 5.2%.

View 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're interested in investigating Sino Golf Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Sino Golf Holdings' ROCE Trending?

It's great to see that Sino Golf Holdings has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 3.7% which is no doubt a relief for some early shareholders. In regards to capital employed, Sino Golf Holdings is using 21% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. Sino Golf Holdings could be selling under-performing assets since the ROCE is improving.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 43% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

The Bottom Line

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. And since the stock has dived 76% over the last five years, there may be other factors affecting the company's prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

On a separate note, we've found 2 warning signs for Sino Golf Holdings you'll probably want to know about.

While Sino Golf Holdings 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.