Returns On Capital Signal Tricky Times Ahead For SH Group (Holdings) (HKG:1637)

There are a few key trends to look for if we want to identify the next multi-bagger. 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. However, after briefly looking over the numbers, we don't think SH Group (Holdings) (HKG:1637) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

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 SH Group (Holdings) is:

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

0.11 = HK$30m ÷ (HK$441m - HK$168m) (Based on the trailing twelve months to September 2020).

So, SH Group (Holdings) has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 9.1% generated by the Construction industry.

Check out our latest analysis for SH Group (Holdings)

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

How Are Returns Trending?

In terms of SH Group (Holdings)'s historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 27%, but since then they've fallen to 11%. However it looks like SH Group (Holdings) might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

Our Take On SH Group (Holdings)'s ROCE

To conclude, we've found that SH Group (Holdings) is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 46% in the last three years. 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.

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

While SH 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. 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.
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