Here's What To Make Of Shuang Yun Holdings' (HKG:1706) 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Shuang Yun Holdings (HKG:1706) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Shuang Yun Holdings:

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

0.072 = S$5.5m ÷ (S$136m - S$60m) (Based on the trailing twelve months to June 2020).

So, Shuang Yun Holdings has an ROCE of 7.2%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 10%.

View our latest analysis for Shuang Yun Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shuang Yun Holdings' ROCE against it's prior returns. If you're interested in investigating Shuang Yun Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Shuang Yun Holdings' ROCE Trending?

On the surface, the trend of ROCE at Shuang Yun Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 34% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Shuang Yun Holdings has decreased its current liabilities to 44% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Shuang Yun Holdings' reinvestment in its own business, we're aware that returns are shrinking. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 93% over the last three years. Therefore based on the analysis done in this article, we don't think Shuang Yun Holdings has the makings of a multi-bagger.

Shuang Yun Holdings does have some risks, we noticed 3 warning signs (and 2 which are potentially serious) we think you should know about.

While Shuang Yun 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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