Investors Will Want Sheung Yue Group Holdings' (HKG:1633) Growth In ROCE To Persist

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Sheung Yue Group Holdings (HKG:1633) and its trend of ROCE, we really liked what we saw.

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

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 Sheung Yue Group Holdings is:

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

0.031 = HK$5.7m ÷ (HK$315m - HK$130m) (Based on the trailing twelve months to September 2024).

So, Sheung Yue Group Holdings has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 5.9%.

View 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 , check out these free graphs detailing revenue and cash flow performance of Sheung Yue Group Holdings.

What Does the ROCE Trend For Sheung Yue Group Holdings Tell Us?

Sheung Yue Group Holdings has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 3.1% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

Another thing to note, Sheung Yue Group Holdings has a high ratio of current liabilities to total assets of 41%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

To sum it up, Sheung Yue Group Holdings is collecting higher returns from the same amount of capital, and that's impressive. And since the stock has fallen 64% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

Sheung Yue Group Holdings does have some risks though, and we've spotted 2 warning signs for Sheung Yue Group Holdings that you might be interested in.

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.