Returns On Capital At Shougang Century Holdings (HKG:103) Paint A Concerning Picture

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at Shougang Century Holdings (HKG:103), we've spotted some signs that it could be struggling, so let's investigate.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Shougang Century Holdings, this is the formula:

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

0.034 = HK$59m ÷ (HK$3.8b - HK$2.0b) (Based on the trailing twelve months to June 2022).

So, Shougang Century Holdings has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 12%.

View our latest analysis for Shougang Century Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shougang Century Holdings' ROCE against it's prior returns. If you'd like to look at how Shougang Century Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about Shougang Century Holdings, given the returns are trending downwards. To be more specific, the ROCE was 6.4% five years ago, but since then it has dropped noticeably. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Shougang Century Holdings becoming one if things continue as they have.

On a separate but related note, it's important to know that Shougang Century Holdings has a current liabilities to total assets ratio of 54%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Shougang Century Holdings' ROCE

In summary, it's unfortunate that Shougang Century Holdings is generating lower returns from the same amount of capital. And long term shareholders have watched their investments stay flat over the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to continue researching Shougang Century Holdings, you might be interested to know about the 3 warning signs that our analysis has discovered.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.