Returns Are Gaining Momentum At Sheung Yue Group Holdings (HKG:1633)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Sheung Yue Group Holdings (HKG:1633) so let's look a bit deeper.

What Is 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. 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)

0.082 = HK$15m ÷ (HK$312m - HK$130m) (Based on the trailing twelve months to March 2023).

Therefore, Sheung Yue Group Holdings has an ROCE of 8.2%. In absolute terms, that's a low return, but it's much better than the Construction industry average of 6.1%.

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're interested in investigating Sheung Yue Group Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

SWOT Analysis for Sheung Yue Group Holdings

What The Trend Of ROCE Can Tell Us

We're delighted to see that Sheung Yue Group Holdings is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but now it's turned around, earning 8.2% which is no doubt a relief for some early shareholders. In regards to capital employed, Sheung Yue Group Holdings is using 21% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 42% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line

In summary, it's great to see that Sheung Yue Group Holdings has been able to turn things around and earn higher returns on lower amounts of capital. And since the stock has dived 76% over the last five years, there may be other factors affecting the company's prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

One more thing: We've identified 3 warning signs with Sheung Yue Group Holdings (at least 1 which is significant) , and understanding them would certainly be useful.

While Sheung Yue Group Holdings 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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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.