Returns On Capital - An Important Metric For Sinofert Holdings (HKG:297)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. With that in mind, we've noticed some promising trends at Sinofert Holdings (HKG:297) so let's look a bit deeper.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Sinofert Holdings is:

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

0.075 = CN¥634m ÷ (CN¥17b - CN¥8.6b) (Based on the trailing twelve months to June 2020).

So, Sinofert Holdings has an ROCE of 7.5%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 11%.

See our latest analysis for Sinofert Holdings

In the above chart we have measured Sinofert Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Sinofert Holdings.

What Can We Tell From Sinofert Holdings' ROCE Trend?

We're pretty happy with how the ROCE has been trending at Sinofert Holdings. The data shows that returns on capital have increased by 736% over the trailing five years. The company is now earning CN¥0.07 per dollar of capital employed. In regards to capital employed, Sinofert Holdings appears to been achieving more with less, since the business is using 50% less capital to run its operation. Sinofert Holdings may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 50% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

What We Can Learn From Sinofert Holdings' ROCE

From what we've seen above, Sinofert Holdings has managed to increase it's returns on capital all the while reducing it's capital base. Given the stock has declined 33% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

Like most companies, Sinofert Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.

While Sinofert Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. 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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