Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. 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, when we ran our eye over Sinopharm Group's (HKG:1099) trend of ROCE, we liked what we saw.
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. The formula for this calculation on Sinopharm Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = CN¥21b ÷ (CN¥344b - CN¥232b) (Based on the trailing twelve months to June 2021).
Therefore, Sinopharm Group has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Healthcare industry average of 9.6% it's much better.
See our latest analysis for Sinopharm Group
Above you can see how the current ROCE for Sinopharm Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From Sinopharm Group's ROCE Trend?
While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 18% and the business has deployed 106% more capital into its operations. Since 18% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
On a side note, Sinopharm Group's current liabilities are still rather high at 67% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
In Conclusion...
In the end, Sinopharm Group has proven its ability to adequately reinvest capital at good rates of return. Yet over the last five years the stock has declined 46%, so the decline might provide an opening. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.
On a final note, we found 2 warning signs for Sinopharm Group (1 is concerning) you should be aware of.
While Sinopharm 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.
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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.
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About SEHK:1099
Sinopharm Group
Engages in the wholesale and retail of pharmaceutical and medical devices and healthcare products in the People’s Republic of China.
Very undervalued with excellent balance sheet and pays a dividend.
