We Like These Underlying Return On Capital Trends At Nanjing Sinolife United (HKG:3332)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Nanjing Sinolife United (HKG:3332) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Nanjing Sinolife United:

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).

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

See our latest analysis for Nanjing Sinolife United

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 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?

It's great to see that Nanjing Sinolife United has started to generate some pre-tax earnings from prior investments. While the business is profitable now, it used to be incurring losses on invested capital five years ago. Additionally, the business is utilizing 47% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. Nanjing Sinolife United could be selling under-performing assets since the ROCE is improving.

What We Can Learn From Nanjing Sinolife United's ROCE

In the end, Nanjing Sinolife United has proven it's capital allocation skills are good with those higher returns from less amount of capital. Astute investors may have an opportunity here because the stock has declined 61% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you want to know some of the risks facing Nanjing Sinolife United we've found 2 warning signs (1 can't be ignored!) that you should be aware of before investing here.

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.