Returns On Capital Signal Tricky Times Ahead For Sinco Pharmaceuticals Holdings (HKG:6833)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Sinco Pharmaceuticals Holdings (HKG:6833), we don't think it's current trends fit the mold of a multi-bagger.

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Understanding 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 Sinco Pharmaceuticals Holdings is:

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

0.17 = CN¥114m ÷ (CN¥2.0b - CN¥1.3b) (Based on the trailing twelve months to December 2024).

Thus, Sinco Pharmaceuticals Holdings has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 8.5% generated by the Healthcare industry.

View our latest analysis for Sinco Pharmaceuticals Holdings

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'd like to look at how Sinco Pharmaceuticals Holdings has performed in the past in other metrics, you can view this free graph of Sinco Pharmaceuticals Holdings' past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Sinco Pharmaceuticals Holdings' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 33% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Sinco Pharmaceuticals Holdings has done well to pay down its current liabilities to 67% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 67% is still pretty high, so those risks are still somewhat prevalent.

Our Take On Sinco Pharmaceuticals Holdings' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Sinco Pharmaceuticals Holdings is reinvesting for growth and has higher sales as a result. However, total returns to shareholders over the last five years have been flat, which could indicate these growth trends potentially aren't accounted for yet by investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Sinco Pharmaceuticals Holdings does have some risks, we noticed 3 warning signs (and 2 which don't sit too well with us) we think you should know about.

While Sinco Pharmaceuticals 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.