There Are Reasons To Feel Uneasy About Sang Hing Holdings (International)'s (HKG:1472) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after investigating Sang Hing Holdings (International) (HKG:1472), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Sang Hing Holdings (International):

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

0.046 = HK$15m ÷ (HK$381m - HK$57m) (Based on the trailing twelve months to March 2022).

Therefore, Sang Hing Holdings (International) has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the Construction industry average of 7.6%.

See our latest analysis for Sang Hing Holdings (International)

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sang Hing Holdings (International)'s ROCE against it's prior returns. If you'd like to look at how Sang Hing Holdings (International) has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Sang Hing Holdings (International)'s ROCE Trending?

On the surface, the trend of ROCE at Sang Hing Holdings (International) doesn't inspire confidence. Around five years ago the returns on capital were 35%, but since then they've fallen to 4.6%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Sang Hing Holdings (International) has decreased its current liabilities to 15% of total assets. So we could link some of this to the decrease in ROCE. 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

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

Bringing it all together, while we're somewhat encouraged by Sang Hing Holdings (International)'s reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 53% over the last year, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you want to know some of the risks facing Sang Hing Holdings (International) we've found 4 warning signs (1 is concerning!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.