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What Can We Learn From SINA Corporation’s (NASDAQ:SINA) Investment Returns?

Today we'll look at SINA Corporation (NASDAQ:SINA) and reflect on its potential as an investment. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'

How Do You Calculate Return On Capital Employed?

The formula for calculating the return on capital employed is:

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

Or for SINA:

0.10 = US$504m ÷ (US$6.4b - US$1.3b) (Based on the trailing twelve months to March 2019.)

Therefore, SINA has an ROCE of 10.0%.

Check out our latest analysis for SINA

Does SINA Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, SINA's ROCE appears to be around the 9.2% average of the Interactive Media and Services industry. Aside from the industry comparison, SINA's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.

In our analysis, SINA's ROCE appears to be 10.0%, compared to 3 years ago, when its ROCE was 1.0%. This makes us wonder if the company is improving. The image below shows how SINA's ROCE compares to its industry, and you can click it to see more detail on its past growth.

NasdaqGS:SINA Past Revenue and Net Income, July 24th 2019
NasdaqGS:SINA Past Revenue and Net Income, July 24th 2019

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for SINA.

How SINA's Current Liabilities Impact Its ROCE

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

SINA has total assets of US$6.4b and current liabilities of US$1.3b. Therefore its current liabilities are equivalent to approximately 21% of its total assets. It is good to see a restrained amount of current liabilities, as this limits the effect on ROCE.

Our Take On SINA's ROCE

With that in mind, we're not overly impressed with SINA's ROCE, so it may not be the most appealing prospect. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

I will like SINA better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.