Capital Allocation Trends At Shineroad International Holdings (HKG:1587) Aren't Ideal

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 briefly looking over the numbers, we don't think Shineroad International Holdings (HKG:1587) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Shineroad International Holdings:

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

0.073 = CN¥39m ÷ (CN¥654m - CN¥121m) (Based on the trailing twelve months to June 2024).

Therefore, Shineroad International Holdings has an ROCE of 7.3%. Even though it's in line with the industry average of 7.3%, it's still a low return by itself.

See our latest analysis for Shineroad International Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shineroad International Holdings' ROCE against it's prior returns. If you'd like to look at how Shineroad International Holdings has performed in the past in other metrics, you can view this free graph of Shineroad International Holdings' past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Shineroad International Holdings' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 7.3% from 12% five years ago. However it looks like Shineroad International 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Shineroad International Holdings' reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 14% in the last five years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Shineroad International Holdings does have some risks though, and we've spotted 2 warning signs for Shineroad International Holdings that you might be interested in.

While Shineroad International Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.