Here's What To Make Of Shi Shi Services' (HKG:8181) Decelerating Rates Of Return

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Having said that, from a first glance at Shi Shi Services (HKG:8181) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is 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. To calculate this metric for Shi Shi Services, this is the formula:

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

0.088 = HK$29m ÷ (HK$411m - HK$84m) (Based on the trailing twelve months to December 2020).

So, Shi Shi Services has an ROCE of 8.8%. In absolute terms, that's a low return but it's around the Consumer Services industry average of 8.1%.

Check out our latest analysis for Shi Shi Services

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 Shi Shi Services has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Shi Shi Services' historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 8.8% for the last five years, and the capital employed within the business has risen 411% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On a side note, Shi Shi Services has done well to reduce current liabilities to 20% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line

As we've seen above, Shi Shi Services' returns on capital haven't increased but it is reinvesting in the business. And in the last five years, the stock has given away 22% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One more thing, we've spotted 2 warning signs facing Shi Shi Services that you might find interesting.

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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