Capital Allocation Trends At Shenghui Cleanness Group Holdings (HKG:2521) Aren't Ideal

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. However, after investigating Shenghui Cleanness Group Holdings (HKG:2521), we don't think it's current trends fit the mold of a multi-bagger.

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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 Shenghui Cleanness Group Holdings:

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

0.049 = CN¥22m ÷ (CN¥636m - CN¥176m) (Based on the trailing twelve months to June 2025).

Thus, Shenghui Cleanness Group Holdings has an ROCE of 4.9%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 7.0%.

Check out our latest analysis for Shenghui Cleanness Group Holdings

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

The Trend Of ROCE

We weren't thrilled with the trend because Shenghui Cleanness Group Holdings' ROCE has reduced by 84% over the last four years, while the business employed 209% more capital. That being said, Shenghui Cleanness Group Holdings raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Shenghui Cleanness Group Holdings probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a related note, Shenghui Cleanness Group Holdings has decreased its current liabilities to 28% of total assets. So we could link some of this to the decrease in ROCE. 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.

The Key Takeaway

In summary, Shenghui Cleanness Group Holdings is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last year, the stock has given away 19% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you want to know some of the risks facing Shenghui Cleanness Group Holdings we've found 3 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing 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.