Sinotrans (HKG:598) Will Want To Turn Around Its Return Trends

There are a few key trends to look for if we want to identify the next multi-bagger. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Sinotrans (HKG:598), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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).

Thus, Sinotrans has an ROCE of 5.7%. Ultimately, that's a low return and it under-performs the Logistics industry average of 17%.

Check out our latest analysis for Sinotrans

Above you can see how the current ROCE for Sinotrans 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 Sinotrans.

What Does the ROCE Trend For Sinotrans Tell Us?

On the surface, the trend of ROCE at Sinotrans doesn't inspire confidence. To be more specific, ROCE has fallen from 8.5% over the last five years. 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. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Sinotrans' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Sinotrans is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 18% over 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.

On a separate note, we've found 1 warning sign for Sinotrans you'll probably want to know about.

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.