The Return Trends At Sinofert Holdings (HKG:297) Look Promising

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. 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. So on that note, Sinofert Holdings (HKG:297) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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).

So, 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 9.5%.

View 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

You'd find it hard not to be impressed with the ROCE trend at Sinofert Holdings. The figures show that over the last five years, returns on capital have grown by 526%. 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 47% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

On a side note, Sinofert Holdings' current liabilities are still rather high at 50% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On 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. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 10% to shareholders. So with that in mind, we think the stock deserves further research.

One more thing to note, we've identified 1 warning sign with Sinofert Holdings and understanding it should be part of your investment process.

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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