There Are Reasons To Feel Uneasy About Shineroad International Holdings' (HKG:1587) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. In light of that, when we looked at Shineroad International Holdings (HKG:1587) and its ROCE trend, we weren't exactly thrilled.

What is 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. To calculate this metric for Shineroad International Holdings, this is the formula:

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

0.12 = CN¥42m ÷ (CN¥422m - CN¥79m) (Based on the trailing twelve months to December 2020).

So, Shineroad International Holdings has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 6.5% generated by the Consumer Retailing industry.

View our latest analysis for Shineroad International Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Shineroad International Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Shineroad International Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 59%, but since then they've fallen to 12%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Shineroad International Holdings has done well to pay down its current liabilities to 19% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Shineroad International Holdings' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Shineroad International Holdings. These growth trends haven't led to growth returns though, since the stock has fallen 13% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Shineroad International Holdings does have some risks, we noticed 4 warning signs (and 1 which is a bit concerning) we think you should know about.

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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