There Are Reasons To Feel Uneasy About Shenglong Splendecor International's (HKG:8481) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Shenglong Splendecor International (HKG:8481), we don't think it's current trends fit the mold of a multi-bagger.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Shenglong Splendecor International:

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

0.093 = CN¥26m ÷ (CN¥544m - CN¥267m) (Based on the trailing twelve months to September 2021).

Therefore, Shenglong Splendecor International has an ROCE of 9.3%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.1%.

Check out our latest analysis for Shenglong Splendecor International

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

What Can We Tell From Shenglong Splendecor International's ROCE Trend?

In terms of Shenglong Splendecor International's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 20% over the last five years. 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 side note, Shenglong Splendecor International's current liabilities are still rather high at 49% of total assets. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Shenglong Splendecor International's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Shenglong Splendecor International is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 44% in the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Shenglong Splendecor International (of which 1 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. 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.