Shangri-La Asia (HKG:69) Could Be At Risk Of Shrinking As A Company

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. In light of that, from a first glance at Shangri-La Asia (HKG:69), we've spotted some signs that it could be struggling, so let's investigate.

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 Shangri-La Asia, this is the formula:

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

0.0098 = US$108m ÷ (US$12b - US$1.4b) (Based on the trailing twelve months to June 2023).

Thus, Shangri-La Asia has an ROCE of 1.0%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 3.8%.

Check out our latest analysis for Shangri-La Asia

In the above chart we have measured Shangri-La Asia's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Shangri-La Asia here for free.

What Does the ROCE Trend For Shangri-La Asia Tell Us?

There is reason to be cautious about Shangri-La Asia, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 2.1% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Shangri-La Asia to turn into a multi-bagger.

In Conclusion...

In summary, it's unfortunate that Shangri-La Asia is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 52% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to know some of the risks facing Shangri-La Asia we've found 2 warning signs (1 is potentially serious!) that you should be aware of before investing here.

While Shangri-La Asia 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.