Can Shenguan Holdings (Group) (HKG:829) Turn Things Around?

When researching a stock for investment, what can tell us that the company is in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. And from a first read, things don't look too good at Shenguan Holdings (Group) (HKG:829), so let's see why.

Understanding 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. Analysts use this formula to calculate it for Shenguan Holdings (Group):

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

0.0057 = CN¥15m ÷ (CN¥3.1b - CN¥422m) (Based on the trailing twelve months to June 2020).

Thus, Shenguan Holdings (Group) has an ROCE of 0.6%. In absolute terms, that's a low return and it also under-performs the Food industry average of 14%.

Check out our latest analysis for Shenguan Holdings (Group)

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenguan Holdings (Group)'s ROCE against it's prior returns. If you're interested in investigating Shenguan Holdings (Group)'s past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Shenguan Holdings (Group)'s historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 19%, however they're now substantially lower than that as we saw above. 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 Shenguan Holdings (Group) to turn into a multi-bagger.

The Bottom Line On Shenguan Holdings (Group)'s ROCE

In summary, it's unfortunate that Shenguan Holdings (Group) is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 60% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

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

While Shenguan Holdings (Group) may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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