Shaw Brothers Holdings (HKG:953) Might Have The Makings Of A Multi-Bagger

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher 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.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.092 = CN¥38m ÷ (CN¥583m - CN¥167m) (Based on the trailing twelve months to December 2021).

Thus, Shaw Brothers Holdings has an ROCE of 9.2%. In absolute terms, that's a low return but it's around the Entertainment industry average of 10%.

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 want to delve into the historical earnings, revenue and cash flow of Shaw Brothers Holdings, check out these free graphs here.

What Does the ROCE Trend For Shaw Brothers Holdings Tell Us?

Shareholders will be relieved that Shaw Brothers Holdings has broken into profitability. The company now earns 9.2% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.

What We Can Learn From 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. However the stock is down a substantial 85% in the last five years so there could be other areas of the business hurting its prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

Shaw Brothers Holdings does have some risks though, and we've spotted 2 warning signs for Shaw Brothers Holdings that you might be interested in.

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.