When looking for a stock to invest, what can tell us that the business is in decline? Typically we will see the trend of both return on capital employed (ROCE) declining and this generally coincides with a decrease amount capital employed. This combination can tell you that the business not only invests less, but earns less on what it invests. So after taking a look at the trends within Sinomax Group (HKG: 1418), we didn’t have too much hope.
Return on capital employed (ROCE): what is it?
If you’ve never worked with ROCE before, it measures the “return” (profit before tax) that a business generates on capital employed in its business. The formula for this calculation on Sinomax Group is:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.047 = HK $ 53 million ÷ (HK $ 2.5 billion – HK $ 1.4 billion) (Based on the last twelve months up to December 2020).
So, Sinomax Group has a ROCE of 4.7%. At the end of the day, that’s a low return, and it’s below the 13% average for the consumer durables industry.
See our latest analysis for Sinomax Group
Although the past is not representative of the future, it can be useful to know the historical performance of a company, which is why we have this graph above. If you want to look at the performance of the Sinomax group in the past in other measures, you can check this free graph of past income, income and cash flow.
What the ROCE trend can tell us
We should be careful with Sinomax Group, as the yields are trending downwards. Unfortunately, the return on capital has fallen from the 20% they earned five years ago. During this time, the capital employed in the company remained roughly stable over the period. Companies that exhibit these attributes tend not to shrink, but they can be mature and face pressure on their competitive margins. So, because these trends are generally not conducive to building a multi-bagger, we will not hold our breath for Sinomax Group to become one if things continue as they have.
In this regard, we noticed that the ratio of current liabilities to total assets rose to 55%, which impacted ROCE. Without this increase, it is likely that ROCE would still be below 4.7%. This means that in reality a fairly significant part of the business is funded by suppliers or short term creditors of the business which can lead to some risk.
The key to take away
In summary, it is unfortunate that Sinomax Group generates lower returns from the same amount of capital. Unsurprisingly, the stock has plunged 81% in the past five years, so investors recognize these changes and dislike the outlook for the company. Unless there is a change to a more positive trajectory in these metrics, we would look elsewhere.
One more thing: we have identified 5 warning signs with Sinomax Group (at least 2 which are a bit rude), and understanding them would certainly be helpful.
Although Sinomax Group does not earn the highest return, check out this free list of companies that generate high returns on equity with strong balance sheets.
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