Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Sinoma Science & TechnologyLtd (SZSE:002080) and its ROCE trend, we weren't exactly thrilled.

What Is 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. The formula for this calculation on Sinoma Science & TechnologyLtd is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.08 = CN¥2.9b ÷ (CN¥55b - CN¥18b) (Based on the trailing twelve months to September 2023).

So, Sinoma Science & TechnologyLtd has an ROCE of 8.0%. In absolute terms, that's a low return, but it's much better than the Chemicals industry average of 5.7%.

Above you can see how the current ROCE for Sinoma Science & TechnologyLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Sinoma Science & TechnologyLtd here for free.

What Can We Tell From Sinoma Science & TechnologyLtd's ROCE Trend?

There are better returns on capital out there than what we're seeing at Sinoma Science & TechnologyLtd. The company has consistently earned 8.0% for the last five years, and the capital employed within the business has risen 141% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

In Conclusion...

Long story short, while Sinoma Science & TechnologyLtd has been reinvesting its capital, the returns that it's generating haven't increased. Although the market must be expecting these trends to improve because the stock has gained 97% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Sinoma Science & TechnologyLtd does have some risks, we noticed 3 warning signs (and 2 which are significant) we think you should know about.

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.

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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.