Returns On Capital At Sinotruk (Hong Kong) (HKG:3808) Paint A Concerning Picture

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Sinotruk (Hong Kong) (HKG:3808), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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¥7.2b ÷ (CN¥130b - CN¥79b) (Based on the trailing twelve months to December 2024).

Thus, Sinotruk (Hong Kong) has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 7.7% generated by the Machinery industry.

View our latest analysis for Sinotruk (Hong Kong)

In the above chart we have measured Sinotruk (Hong Kong)'s prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Sinotruk (Hong Kong) .

What Does the ROCE Trend For Sinotruk (Hong Kong) Tell Us?

When we looked at the ROCE trend at Sinotruk (Hong Kong), we didn't gain much confidence. Over the last five years, returns on capital have decreased to 14% from 18% five years ago. 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.

Another thing to note, Sinotruk (Hong Kong) has a high ratio of current liabilities to total assets of 61%. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Sinotruk (Hong Kong)'s ROCE

While returns have fallen for Sinotruk (Hong Kong) in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Furthermore the stock has climbed 41% over the last five years, it would appear that investors are upbeat about the future. 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 it should be part of your investment process.

While Sinotruk (Hong Kong) may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.