If you're looking for a multi-bagger, there's a few things to 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. 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 Sinotruk (Hong Kong) (HKG:3808), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Sinotruk (Hong Kong):
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = CN¥7.1b ÷ (CN¥133b - CN¥83b) (Based on the trailing twelve months to June 2024).
Thus, Sinotruk (Hong Kong) has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 9.1% it's much better.
Check out our latest analysis for Sinotruk (Hong Kong)
Above you can see how the current ROCE for Sinotruk (Hong Kong) 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 analyst report for Sinotruk (Hong Kong) .
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Sinotruk (Hong Kong) doesn't inspire confidence. Over the last five years, returns on capital have decreased to 14% from 21% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
Another thing to note, Sinotruk (Hong Kong) has a high ratio of current liabilities to total assets of 63%. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line On Sinotruk (Hong Kong)'s ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Sinotruk (Hong Kong) is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 97% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.
One more thing to note, we've identified 1 warning sign with Sinotruk (Hong Kong) and understanding this should be part of your investment process.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.