What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Sinostar PEC Holdings (SGX:C9Q) and its ROCE trend, we weren't exactly thrilled.

What Is 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. The formula for this calculation on Sinostar PEC Holdings is:

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

0.059 = CN¥118m ÷ (CN¥2.5b - CN¥472m) (Based on the trailing twelve months to June 2023).

So, Sinostar PEC Holdings has an ROCE of 5.9%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 12%.

See our latest analysis for Sinostar PEC Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sinostar PEC Holdings' ROCE against it's prior returns. If you'd like to look at how Sinostar PEC Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Sinostar PEC Holdings' ROCE Trend?

When we looked at the ROCE trend at Sinostar PEC Holdings, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.9% from 14% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 19%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 5.9%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Bottom Line

To conclude, we've found that Sinostar PEC Holdings is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 37% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Sinostar PEC Holdings (of which 1 can't be ignored!) that you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.