# What Do You Get For Owning Sinopharm Group Co Ltd (HKG:1099)?

If you purchase a 1099 share you are effectively becoming a partner with many other shareholders. Your equity share is granted in return for the capital provided to the business to operate, and in order for an investment to be successful the business has to create earnings from the funds that make up this capital. Your return is tied to 1099’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. To understand Sinopharm Group’s capital returns we will look at a useful metric called return on capital employed. This will tell us if the company is growing your capital and placing you in good stead to sell your shares at a profit.

### Calculating Return On Capital Employed for 1099

Choosing to invest in Sinopharm Group comes at the cost of investing in another potentially favourable company. Therefore all else aside, your investment in a certain company represents a vote of confidence that the money used to buy the stock will grow larger than if invested elsewhere. So the business’ ability to grow the size of your capital is very important and can be assessed by comparing the return on capital you can get on your investment with a hurdle rate that depends on the other return possibilities you can identify. We’ll look at Sinopharm Group’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. I have calculated Sinopharm Group’s ROCE for you below:

ROCE Calculation for 1099

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = CN¥9.80b ÷ (CN¥169.54b – CN¥110.88b) = 16.71%

1099’s 16.71% ROCE means that for every HK\$100 you invest, the company creates HK\$16.7. A good ROCE hurdle you should aim for in your investments is 15%, which is exceeded by 1099 and means the company creates a solid amount of earnings on capital employed. If this can be sustained with good reinvestment opportunities or dividend distributions your capital has the potential to compound over time.

### Before moving forward

Although Sinopharm Group is in a favourable position, you should know that this could change if the company is unable to maintain a strong ROCE above the benchmark, which will depend on the behaviour of the underlying variables (EBT and capital employed). Therefore, investors need to be confident in the trend of the inputs in the formula above, so that Sinopharm Group will continue the solid returns. Looking at the past 3 year period shows us that 1099 boosted investor return on capital employed from 13.83%. Over the same period, EBT went from CN¥5.89b to CN¥9.80b and the amount of capital employed also grew but by a proportionally lesser volume, which suggests the larger ROCE is due to a growth in earnings relative to capital requirements.

### Next Steps

ROCE for 1099 investors has grown in the last few years and is currently at a level that makes the company an attractive candidate that is capable of producing solid capital returns, and hence, an attractive return on investment. As an investor this is the type of situation you look for, but return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and valuation. Without considering these fundamentals, you cannot be sure if this trend will continue or if you are getting a good deal for the future returns you are paying for. If you’re interested in diving deeper, take a look at what I’ve linked below for further information on these fundamentals and other potential investment opportunities.

1. Future Outlook: What are well-informed industry analysts predicting for 1099’s future growth? Take a look at our free research report of analyst consensus for 1099’s outlook.
2. Valuation: What is 1099 worth today? Is the stock undervalued, even if its ROCE is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether 1099 is currently mispriced by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.