Here's What's Concerning About Sheung Yue Group Holdings' (HKG:1633) Returns On Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at Sheung Yue Group Holdings (HKG:1633), we've spotted some signs that it could be struggling, so let's investigate.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Sheung Yue Group Holdings is:

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

0.067 = HK$12m ÷ (HK$288m - HK$116m) (Based on the trailing twelve months to March 2022).

Thus, Sheung Yue Group Holdings has an ROCE of 6.7%. On its own, that's a low figure but it's around the 8.0% average generated by the Construction industry.

Check out our latest analysis for Sheung Yue Group Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sheung Yue Group Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Sheung Yue Group Holdings, check out these free graphs here.

How Are Returns Trending?

We are a bit anxious about the trends of ROCE at Sheung Yue Group Holdings. Unfortunately, returns have declined substantially over the last five years to the 6.7% we see today. On top of that, the business is utilizing 34% less capital within its operations. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. If these underlying trends continue, we wouldn't be too optimistic going forward.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 40%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 6.7%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

Our Take On Sheung Yue Group Holdings' ROCE

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Long term shareholders who've owned the stock over the last five years have experienced a 64% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we've found 2 warning signs for Sheung Yue Group Holdings that we think you should be aware of.

While Sheung Yue Group Holdings 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.