Sun Hing Printing Holdings (HKG:1975) May Have Issues Allocating Its Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. So when we looked at Sun Hing Printing Holdings (HKG:1975), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Sun Hing Printing Holdings:

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

0.23 = HK$125m ÷ (HK$686m - HK$136m) (Based on the trailing twelve months to December 2021).

Thus, Sun Hing Printing Holdings has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Commercial Services industry average of 8.1%.

Check out our latest analysis for Sun Hing Printing Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sun Hing Printing Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Sun Hing Printing Holdings, check out these free graphs here.

So How Is Sun Hing Printing Holdings' ROCE Trending?

When we looked at the ROCE trend at Sun Hing Printing Holdings, we didn't gain much confidence. Historically returns on capital were even higher at 34%, but they have dropped 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.

What We Can Learn From Sun Hing Printing Holdings' ROCE

While returns have fallen for Sun Hing Printing Holdings in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has done incredibly well with a 105% return over the last three years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

One more thing: We've identified 4 warning signs with Sun Hing Printing Holdings (at least 1 which doesn't sit too well with us) , and understanding them would certainly be useful.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.