Some Investors May Be Worried About China Shuifa Singyes Energy Holdings' (HKG:750) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Although, when we looked at China Shuifa Singyes Energy Holdings (HKG:750), it didn't seem to tick all of these boxes.

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. To calculate this metric for China Shuifa Singyes Energy Holdings, this is the formula:

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

0.044 = CN¥434m ÷ (CN¥17b - CN¥7.1b) (Based on the trailing twelve months to December 2022).

So, China Shuifa Singyes Energy Holdings has an ROCE of 4.4%. Ultimately, that's a low return and it under-performs the Construction industry average of 6.0%.

View 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.

So How Is China Shuifa Singyes Energy Holdings' ROCE Trending?

In terms of China Shuifa Singyes Energy Holdings' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 7.8% 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.

Another thing to note, China Shuifa Singyes Energy Holdings has a high ratio of current liabilities to total assets of 42%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

From the above analysis, we find it rather worrisome that returns on capital and sales for China Shuifa Singyes Energy Holdings have fallen, meanwhile the business is employing more capital than it was five years ago. Unsurprisingly then, the stock has dived 77% over the last five years, so investors are recognizing these changes and don't like the company's prospects. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we found 2 warning signs for China Shuifa Singyes Energy Holdings (1 is a bit concerning) you should be aware of.

While China Shuifa Singyes Energy 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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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.