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Will The ROCE Trend At So-Young International (NASDAQ:SY) Continue?

Simply Wall St
·3 min read

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Speaking of which, we noticed some great changes in So-Young International's (NASDAQ:SY) returns on capital, so let's have a look.

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. To calculate this metric for So-Young International, this is the formula:

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

0.014 = CN¥41m ÷ (CN¥3.3b - CN¥499m) (Based on the trailing twelve months to June 2020).

So, So-Young International has an ROCE of 1.4%. In absolute terms, that's a low return and it also under-performs the Interactive Media and Services industry average of 6.7%.

View our latest analysis for So-Young International

roce
roce

Above you can see how the current ROCE for So-Young International 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 So-Young International here for free.

What The Trend Of ROCE Can Tell Us

The fact that So-Young International is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses three years ago, but now it's earning 1.4% which is a sight for sore eyes. In addition to that, So-Young International is employing 975% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 15%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

In Conclusion...

Long story short, we're delighted to see that So-Young International's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a solid 12% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if So-Young International can keep these trends up, it could have a bright future ahead.

If you want to continue researching So-Young International, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.

This article by Simply Wall St is general in nature. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.