Shanshan Brand Management (HKG:1749) Might Be Having Difficulty Using Its Capital Effectively

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 Shanshan Brand Management (HKG:1749), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Shanshan Brand Management is:

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

0.047 = CN¥11m ÷ (CN¥760m - CN¥525m) (Based on the trailing twelve months to June 2022).

Thus, Shanshan Brand Management has an ROCE of 4.7%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 12%.

See our latest analysis for Shanshan Brand Management

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

What Does the ROCE Trend For Shanshan Brand Management Tell Us?

On the surface, the trend of ROCE at Shanshan Brand Management doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.7% from 40% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a separate but related note, it's important to know that Shanshan Brand Management has a current liabilities to total assets ratio of 69%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Shanshan Brand Management's ROCE

We're a bit apprehensive about Shanshan Brand Management because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors haven't taken kindly to these developments, since the stock has declined 33% from where it was three years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing: We've identified 4 warning signs with Shanshan Brand Management (at least 2 which are a bit concerning) , and understanding them would certainly be useful.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.