Sino-Life Group's (HKG:8296) Returns On Capital Are Heading Higher

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Sino-Life Group's (HKG:8296) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Sino-Life Group is:

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

0.033 = CN¥5.1m ÷ (CN¥285m - CN¥131m) (Based on the trailing twelve months to June 2021).

Therefore, Sino-Life Group has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Consumer Services industry average of 7.8%.

View our latest analysis for Sino-Life Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sino-Life Group's ROCE against it's prior returns. If you're interested in investigating Sino-Life Group's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Sino-Life Group's ROCE Trending?

Shareholders will be relieved that Sino-Life Group has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 3.3%, which is always encouraging. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

Another thing to note, Sino-Life Group has a high ratio of current liabilities to total assets of 46%. 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.

Our Take On Sino-Life Group's ROCE

In summary, we're delighted to see that Sino-Life Group has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 59% return over the last five years. In light of that, we think it's worth looking further into this stock because if Sino-Life Group can keep these trends up, it could have a bright future ahead.

On a final note, we've found 2 warning signs for Sino-Life Group that we think you should be aware of.

While Sino-Life Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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.

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