Returns On Capital Signal Tricky Times Ahead For Sinotrans (HKG:598)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Sinotrans (HKG:598) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. To calculate this metric for Sinotrans, this is the formula:

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

0.057 = CN¥2.9b ÷ (CN¥78b - CN¥26b) (Based on the trailing twelve months to March 2022).

So, Sinotrans has an ROCE of 5.7%. Ultimately, that's a low return and it under-performs the Logistics industry average of 16%.

View our latest analysis for Sinotrans

In the above chart we have measured Sinotrans' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Sinotrans here for free.

What Does the ROCE Trend For Sinotrans Tell Us?

When we looked at the ROCE trend at Sinotrans, we didn't gain much confidence. Around five years ago the returns on capital were 8.5%, but since then they've fallen to 5.7%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Sinotrans' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Sinotrans. And there could be an opportunity here if other metrics look good too, because the stock has declined 34% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

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

While Sinotrans 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.