Sinofert Holdings' (HKG:297) Returns On Capital Are Heading Higher

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Sinofert Holdings' (HKG:297) returns on capital, so let's have a look.

What is 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 Sinofert Holdings, this is the formula:

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

0.069 = CN¥590m ÷ (CN¥17b - CN¥8.5b) (Based on the trailing twelve months to December 2020).

Thus, Sinofert Holdings has an ROCE of 6.9%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 9.7%.

See our latest analysis for Sinofert Holdings

Above you can see how the current ROCE for Sinofert Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Sinofert Holdings.

So How Is Sinofert Holdings' ROCE Trending?

We're pretty happy with how the ROCE has been trending at Sinofert Holdings. The data shows that returns on capital have increased by 526% over the trailing five years. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Sinofert Holdings appears to been achieving more with less, since the business is using 47% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

Another thing to note, Sinofert Holdings has a high ratio of current liabilities to total assets of 50%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

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. And with a respectable 71% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing, we've spotted 2 warning signs facing Sinofert Holdings that you might find interesting.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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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