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

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. On that note, looking into Shangri-La Asia (HKG:69), we weren't too upbeat about how things were going.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Shangri-La Asia is:

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

0.018 = US$208m ÷ (US$13b - US$1.5b) (Based on the trailing twelve months to December 2023).

Therefore, Shangri-La Asia has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 6.1%.

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 to see what analysts are forecasting going forward, you should check out our free analyst report for Shangri-La Asia .

The Trend Of ROCE

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 2.6% 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. 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.

The Key Takeaway

In summary, it's unfortunate that Shangri-La Asia is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 41% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Like most companies, Shangri-La Asia does come with some risks, and we've found 1 warning sign that you should be aware of.

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.