Shanghai Pioneer Holding (HKG:1345) Is Finding It Tricky To Allocate Its Capital

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. And from a first read, things don't look too good at Shanghai Pioneer Holding (HKG:1345), so let's see why.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Shanghai Pioneer Holding:

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

0.17 = CN¥177m ÷ (CN¥1.4b - CN¥373m) (Based on the trailing twelve months to June 2023).

Thus, Shanghai Pioneer Holding has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Healthcare industry average of 11% it's much better.

View our latest analysis for Shanghai Pioneer Holding

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Shanghai Pioneer Holding.

How Are Returns Trending?

In terms of Shanghai Pioneer Holding's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 21%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Shanghai Pioneer Holding to turn into a multi-bagger.

Our Take On Shanghai Pioneer Holding's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 102%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Shanghai Pioneer Holding does have some risks, we noticed 2 warning signs (and 1 which is significant) we think you should know about.

While Shanghai Pioneer Holding 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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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.