What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Sino-Life Group (HKG:8296) 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. To calculate this metric for Sino-Life Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0064 = CN¥929k ÷ (CN¥280m - CN¥135m) (Based on the trailing twelve months to December 2020).
Therefore, Sino-Life Group has an ROCE of 0.6%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 7.7%.
See our latest analysis for Sino-Life Group
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 want to delve into the historical earnings, revenue and cash flow of Sino-Life Group, check out these free graphs here.
What Does the ROCE Trend For Sino-Life Group Tell Us?
Sino-Life Group has broken into the black (profitability) and we're sure it's a sight for sore eyes. While the business was unprofitable in the past, it's now turned things around and is earning 0.6% on its capital. While returns have increased, the amount of capital employed by Sino-Life Group has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 48% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.
The Bottom Line On Sino-Life Group's ROCE
To bring it all together, Sino-Life Group has done well to increase the returns it's generating from its capital employed. Since the stock has only returned 14% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.
On a final note, we've found 1 warning sign for Sino-Life Group that we think you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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About SEHK:8296
Sino-Life Group
An investment holding company, provides funeral and related services in the People’s Republic of China, Taiwan, Hong Kong, and Vietnam.
Excellent balance sheet slight.
