Nanjing Sinolife United (HKG:3332) Shareholders Will Want The ROCE Trajectory To Continue

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. With that in mind, we've noticed some promising trends at Nanjing Sinolife United (HKG:3332) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Nanjing Sinolife United, this is the formula:

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

0.047 = CN¥19m ÷ (CN¥460m - CN¥64m) (Based on the trailing twelve months to June 2023).

Therefore, Nanjing Sinolife United has an ROCE of 4.7%. Ultimately, that's a low return and it under-performs the Personal Products industry average of 13%.

Check out our latest analysis for Nanjing Sinolife United

Historical performance is a great place to start when researching a stock so above you can see the gauge for Nanjing Sinolife United's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Nanjing Sinolife United, check out these free graphs here.

So How Is Nanjing Sinolife United's ROCE Trending?

Like most people, we're pleased that Nanjing Sinolife United is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 4.7% which is no doubt a relief for some early shareholders. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 47%. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

Our Take On Nanjing Sinolife United's ROCE

From what we've seen above, Nanjing Sinolife United has managed to increase it's returns on capital all the while reducing it's capital base. And since the stock has fallen 31% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

If you want to continue researching Nanjing Sinolife United, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Nanjing Sinolife United 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.