Shaw Brothers Holdings (HKG:953) Is Looking To Continue Growing Its Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Shaw Brothers Holdings' (HKG:953) returns on capital, so let's have a look.

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

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. To calculate this metric for Shaw Brothers Holdings, this is the formula:

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

0.11 = CN¥47m ÷ (CN¥581m - CN¥152m) (Based on the trailing twelve months to June 2022).

Thus, Shaw Brothers Holdings has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Entertainment industry average of 6.8% it's much better.

Check out our latest analysis for Shaw Brothers Holdings

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

How Are Returns Trending?

Shaw Brothers Holdings has broken into the black (profitability) and we're sure it's a sight for sore eyes. While the business was unprofitable in the past, it's now turned things around and is earning 11% on its capital. While returns have increased, the amount of capital employed by Shaw Brothers Holdings has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

The Bottom Line On Shaw Brothers Holdings' ROCE

In summary, we're delighted to see that Shaw Brothers Holdings has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. With that in mind, we believe the promising trends warrant this stock for further investigation.

Shaw Brothers Holdings does have some risks, we noticed 3 warning signs (and 2 which are a bit unpleasant) we think you should know about.

While Shaw Brothers Holdings 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.