Stock Analysis

Returns On Capital Signal Tricky Times Ahead For Sang Hing Holdings (International) (HKG:1472)

SEHK:1472
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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Having said that, from a first glance at Sang Hing Holdings (International) (HKG:1472) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Sang Hing Holdings (International) is:

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

0.022 = HK$7.2m ÷ (HK$357m - HK$31m) (Based on the trailing twelve months to September 2022).

Thus, Sang Hing Holdings (International) has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 6.9%.

Check out our latest analysis for Sang Hing Holdings (International)

roce
SEHK:1472 Return on Capital Employed March 31st 2023

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.

How Are Returns Trending?

On the surface, the trend of ROCE at Sang Hing Holdings (International) doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.2% from 33% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Sang Hing Holdings (International) has done well to pay down its current liabilities to 8.8% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Sang Hing Holdings (International)'s ROCE

While returns have fallen for Sang Hing Holdings (International) in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Despite these promising trends, the stock has collapsed 95% over the last three years, so there could be other factors hurting the company's prospects. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

If you want to know some of the risks facing Sang Hing Holdings (International) we've found 5 warning signs (2 don't sit too well with us!) that you should be aware of before investing here.

While Sang Hing Holdings (International) isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.