Shun Ho Holdings' (HKG:253) Returns On Capital Not Reflecting Well On The Business

When researching a stock for investment, what can tell us that the company is in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after we looked into Shun Ho Holdings (HKG:253), the trends above didn't look too great.

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. The formula for this calculation on Shun Ho Holdings is:

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

0.0073 = HK$71m ÷ (HK$9.9b - HK$169m) (Based on the trailing twelve months to June 2023).

Therefore, Shun Ho Holdings has an ROCE of 0.7%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 3.6%.

Check out our latest analysis for Shun Ho Holdings

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

How Are Returns Trending?

There is reason to be cautious about Shun Ho Holdings, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 3.2% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Shun Ho Holdings to turn into a multi-bagger.

In Conclusion...

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. It should come as no surprise then that the stock has fallen 67% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Shun Ho Holdings does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit concerning...

While Shun Ho 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.