There Are Reasons To Feel Uneasy About Shenzhou International Group Holdings' (HKG:2313) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Shenzhou International Group Holdings (HKG:2313) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Shenzhou International Group Holdings is:

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

0.10 = CN¥3.2b ÷ (CN¥43b - CN¥13b) (Based on the trailing twelve months to June 2022).

Therefore, Shenzhou International Group Holdings has an ROCE of 10%. That's a pretty standard return and it's in line with the industry average of 10%.

View our latest analysis for Shenzhou International Group Holdings

Above you can see how the current ROCE for Shenzhou International Group Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Shenzhou International Group Holdings.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Shenzhou International Group Holdings doesn't inspire confidence. Around five years ago the returns on capital were 20%, but since then they've fallen to 10%. However it looks like Shenzhou International Group Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 30%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 10%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Bottom Line

In summary, Shenzhou International Group Holdings is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be recognizing these trends since the stock has only returned a total of 29% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you want to continue researching Shenzhou International Group Holdings, you might be interested to know about the 2 warning signs that our analysis has discovered.

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.