The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to begin learning the link between Shineco Inc (NASDAQ:TYHT)’s return fundamentals and stock market performance.
Purchasing Shineco gives you an ownership stake in the company. Owing to this, it is important that the underlying business is producing a sufficient amount of income from the capital invested by stockholders. This is because the actual cash flow generated by the business dictates the potential for income (dividends) and capital appreciation (price increases), which are the two ways to achieve positive returns when buying a stock. Thus, to understand how your money can grow by investing in Shineco, you need to look at what the company returns to owners for the use of their capital, which can be done in many ways but today we will use return on capital employed (ROCE).
Shineco’s Return On Capital Employed
Choosing to invest in Shineco comes at the cost of investing in another potentially favourable company. The cost of missing out on another opportunity comes in the form of the potential long term gain you could’ve received, which is dependent on the gap between the return on capital you could’ve achieved and that of the company you invested in. Hence, capital returns are very important, and should be examined before you invest in conjunction with a certain benchmark that represents the minimum return you require to be compensated for the risk of missing out on other potentially lucrative investments. A good metric to use is return on capital employed (ROCE), which helps us gauge how much income can be created from the funds needed to operate the business. This metric will tell us if Shineco is good at growing investor capital. Take a look at the formula box beneath:
ROCE Calculation for TYHT
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = US$12.99m ÷ (US$89.26m – US$10.50m) = 16.50%
As you can see, TYHT earned $16.5 from every $100 you invested over the previous twelve months. A good ROCE hurdle you should aim for in your investments is 15%, which is exceeded by TYHT and means the company creates a solid amount of earnings on capital employed. If this can be sustained with good reinvestment opportunities or dividend distributions your capital has the potential to compound over time.
A deeper look
Although Shineco is in a favourable position, you should know that this could change if the company is unable to maintain a strong ROCE above the benchmark, which will depend on the behaviour of the underlying variables (EBT and capital employed). So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving. Looking at the past 3 year period shows us that TYHT weakened investor return on capital employed from 24.36%. With this, the current earnings of US$12.99m improved from US$11.01m however capital employed has increased by a relatively larger volume in response to a rise in total assets , which suggests investor’s ROCE has fallen because the company requires more capital to create earnings despite the previous growth in EBT.
Despite TYHT’s downward trend in ROCE in the recent past, the company still remains an attractive candidate that is capable of producing solid capital returns and a potentially strong return on investment. Before making any decisions, ROCE does not tell the whole picture so you need to pay attention to other fundamentals like future prospects and management ability. If you don’t pay attention to these factors you cannot be sure if the downward path is a signal to run, or just a blip in an otherwise solid return profile. If you’re building your portfolio and want to take a deeper look, I’ve added a few links below that will help you further evaluate TYHT or other alternatives.
- Future Outlook: What are well-informed industry analysts predicting for TYHT’s future growth? Take a look at our free research report of analyst consensus for TYHT’s outlook.
- Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for Shineco’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.