Here's What Shriro Holdings' (ASX:SHM) Strong Returns On Capital Mean

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Ergo, when we looked at the ROCE trends at Shriro Holdings (ASX:SHM), we liked what we saw.

Understanding 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 Shriro Holdings is:

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

0.29 = AU$21m ÷ (AU$109m - AU$36m) (Based on the trailing twelve months to December 2020).

So, Shriro Holdings has an ROCE of 29%. In absolute terms that's a great return and it's even better than the Consumer Durables industry average of 21%.

See our latest analysis for Shriro Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shriro Holdings' ROCE against it's prior returns. If you're interested in investigating Shriro Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Shriro Holdings deserves to be commended in regards to it's returns. Over the past five years, ROCE has remained relatively flat at around 29% and the business has deployed 22% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. You'll see this when looking at well operated businesses or favorable business models.

In Conclusion...

In summary, we're delighted to see that Shriro Holdings has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And the stock has followed suit returning a meaningful 61% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

If you'd like to know more about Shriro Holdings, we've spotted 4 warning signs, and 1 of them doesn't sit too well with us.

Shriro Holdings is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.
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