Returns On Capital At Shuang Yun Holdings (HKG:1706) Paint A Concerning Picture

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Shuang Yun Holdings (HKG:1706), we don't think it's current trends fit the mold of a multi-bagger.

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. 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)

0.0047 = S$314k ÷ (S$141m - S$75m) (Based on the trailing twelve months to December 2020).

Therefore, Shuang Yun Holdings has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 9.4%.

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.

What Can We Tell From Shuang Yun Holdings' ROCE Trend?

When we looked at the ROCE trend at Shuang Yun Holdings, we didn't gain much confidence. To be more specific, ROCE has fallen from 35% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a separate but related note, it's important to know that Shuang Yun Holdings has a current liabilities to total assets ratio of 53%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for Shuang Yun Holdings have fallen, meanwhile the business is employing more capital than it was five years ago. We expect this has contributed to the stock plummeting 96% during the last three years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to know some of the risks facing Shuang Yun Holdings we've found 5 warning signs (2 can't be ignored!) that you should be aware of before investing here.

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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