There Are Reasons To Feel Uneasy About SH Group (Holdings)'s (HKG:1637) Returns On Capital

If you're looking for a multi-bagger, there's a few things to 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at SH Group (Holdings) (HKG:1637) and its ROCE trend, we weren't exactly thrilled.

Understanding 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)

0.15 = HK$45m ÷ (HK$488m - HK$194m) (Based on the trailing twelve months to September 2021).

Thus, SH Group (Holdings) has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Construction industry average of 8.4% it's much better.

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.

What Does the ROCE Trend For SH Group (Holdings) Tell Us?

On the surface, the trend of ROCE at SH Group (Holdings) doesn't inspire confidence. To be more specific, ROCE has fallen from 24% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On SH Group (Holdings)'s ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for SH Group (Holdings). These growth trends haven't led to growth returns though, since the stock has fallen 21% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

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

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. 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.