Returns On Capital Signal Difficult Times Ahead For Sheen Tai Holdings Group (HKG:1335)

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. 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. On that note, looking into Sheen Tai Holdings Group (HKG:1335), we weren't too upbeat about how things were going.

What Is 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. The formula for this calculation on Sheen Tai Holdings Group is:

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

0.016 = HK$13m ÷ (HK$828m - HK$27m) (Based on the trailing twelve months to December 2022).

So, Sheen Tai Holdings Group has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Packaging industry average of 6.6%.

See our latest analysis for Sheen Tai Holdings Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sheen Tai Holdings Group's ROCE against it's prior returns. If you're interested in investigating Sheen Tai 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

There is reason to be cautious about Sheen Tai Holdings Group, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 7.0% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Sheen Tai Holdings Group becoming one if things continue as they have.

On a related note, Sheen Tai Holdings Group has decreased its current liabilities to 3.2% of total assets. That could partly explain why the ROCE has dropped. 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.

The Key Takeaway

In summary, it's unfortunate that Sheen Tai 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 61% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Like most companies, Sheen Tai Holdings Group does come with some risks, and we've found 4 warning signs that you should be aware of.

While Sheen Tai Holdings Group 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.