Shun Ho Holdings (HKG:253) Will Be Hoping To Turn Its Returns On Capital Around

By
Simply Wall St
Published
June 06, 2021
SEHK:253
Source: Shutterstock

If you're looking for a multi-bagger, there's a few things to keep an eye out 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Shun Ho Holdings (HKG:253), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Shun Ho Holdings, this is the formula:

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

0.0078 = HK$69m ÷ (HK$9.1b - HK$310m) (Based on the trailing twelve months to December 2020).

So, Shun Ho Holdings has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 2.6%.

See our latest analysis for Shun Ho Holdings

roce
SEHK:253 Return on Capital Employed June 7th 2021

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'd like to look at how Shun Ho Holdings has performed in the past in other metrics, you can view 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 Shun Ho Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 3.0%, but since then they've fallen to 0.8%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Key Takeaway

In summary, we're somewhat concerned by Shun Ho Holdings' diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 63% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we found 2 warning signs for Shun Ho Holdings (1 can't be ignored) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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