China Shuifa Singyes Energy Holdings (HKG:750) Will Be Hoping To Turn Its Returns On Capital Around

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. And from a first read, things don't look too good at China Shuifa Singyes Energy Holdings (HKG:750), so let's see why.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on China Shuifa Singyes Energy Holdings is:

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

0.014 = CN¥111m ÷ (CN¥13b - CN¥5.4b) (Based on the trailing twelve months to December 2020).

Thus, China Shuifa Singyes Energy Holdings has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Construction industry average of 7.4%.

Check out our latest analysis for China Shuifa Singyes Energy Holdings

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

How Are Returns Trending?

In terms of China Shuifa Singyes Energy Holdings' historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 5.6%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on China Shuifa Singyes Energy Holdings becoming one if things continue as they have.

On a side note, China Shuifa Singyes Energy Holdings' current liabilities have increased over the last five years to 41% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 1.4%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Key Takeaway

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Long term shareholders who've owned the stock over the last five years have experienced a 41% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for China Shuifa Singyes Energy Holdings (of which 2 can't be ignored!) that you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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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