Returns On Capital At Sang Hing Holdings (International) (HKG:1472) Paint A Concerning Picture

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. However, after briefly looking over the numbers, we don't think Sang Hing Holdings (International) (HKG:1472) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Sang Hing Holdings (International), this is the formula:

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

0.18 = HK$54m ÷ (HK$358m - HK$55m) (Based on the trailing twelve months to September 2020).

So, Sang Hing Holdings (International) has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 9.1% generated by the Construction industry.

See our latest analysis for Sang Hing Holdings (International)

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Sang Hing Holdings (International)'s past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Sang Hing Holdings (International) Tell Us?

In terms of Sang Hing Holdings (International)'s historical ROCE movements, the trend isn't fantastic. Around three years ago the returns on capital were 33%, but since then they've fallen to 18%. However it looks like Sang Hing Holdings (International) might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Sang Hing Holdings (International) has decreased its current liabilities to 16% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Sang Hing Holdings (International)'s ROCE

In summary, Sang Hing Holdings (International) is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 85% in the last year. 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 5 warning signs for Sang Hing Holdings (International) (of which 1 is a bit concerning!) that you should know about.

While Sang Hing Holdings (International) may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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