Here's What's Concerning About Shi Shi Services' (HKG:8181) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Although, when we looked at Shi Shi Services (HKG:8181), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Shi Shi Services:

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

0.052 = HK$17m ÷ (HK$410m - HK$81m) (Based on the trailing twelve months to December 2021).

Thus, Shi Shi Services has an ROCE of 5.2%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 9.9%.

See our latest analysis for Shi Shi Services

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shi Shi Services' ROCE against it's prior returns. 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.

So How Is Shi Shi Services' ROCE Trending?

On the surface, the trend of ROCE at Shi Shi Services doesn't inspire confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 5.2%. However it looks like Shi Shi Services might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Shi Shi Services has done well to pay down its current liabilities to 20% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Shi Shi Services' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 53% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Shi Shi Services (including 1 which is a bit unpleasant) .

While Shi Shi Services 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.