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

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 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)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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).

Thus, Shineroad International Holdings has an ROCE of 7.3%. Even though it's in line with the industry average of 7.4%, it's still a low return by itself.

Check out 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're interested in investigating Shineroad International Holdings' past further, check out this free graph covering Shineroad International Holdings' past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Shineroad International Holdings doesn't inspire confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 7.3%. 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 may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

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 with the stock having returned a mere 29% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

On a final note, we've found 1 warning sign for Shineroad International Holdings that we think you should be aware of.

While Shineroad International Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.