Some Investors May Be Worried About Man Shing Global Holdings' (HKG:8309) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, while the ROCE is currently high for Man Shing Global Holdings (HKG:8309), we aren't jumping out of our chairs because returns are decreasing.

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

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 Man Shing Global Holdings:

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

0.27 = HK$28m ÷ (HK$209m - HK$107m) (Based on the trailing twelve months to December 2020).

Thus, Man Shing Global Holdings has an ROCE of 27%. That's a fantastic return and not only that, it outpaces the average of 9.3% earned by companies in a similar industry.

Check out our latest analysis for Man Shing Global Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Man Shing Global Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Man Shing Global Holdings' ROCE Trending?

On the surface, the trend of ROCE at Man Shing Global Holdings doesn't inspire confidence. While it's comforting that the ROCE is high, five years ago it was 53%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Man Shing Global Holdings has decreased its current liabilities to 51% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

What We Can Learn From Man Shing Global Holdings' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Man Shing Global Holdings is reinvesting for growth and has higher sales as a result. But since the stock has dived 80% in the last three years, there could be other drivers that are influencing the business' outlook. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

On a final note, we found 3 warning signs for Man Shing Global Holdings (1 doesn't sit too well with us) you should be aware of.

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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