The Returns On Capital At Sheen Tai Holdings Group (HKG:1335) Don't Inspire Confidence

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at Sheen Tai Holdings Group (HKG:1335), so let's see why.

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

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 Sheen Tai Holdings Group, this is the formula:

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

0.0037 = HK$2.7m ÷ (HK$753m - HK$23m) (Based on the trailing twelve months to June 2024).

Thus, Sheen Tai Holdings Group has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Electronic industry average of 7.4%.

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'd like to look at how Sheen Tai Holdings Group has performed in the past in other metrics, you can view this free graph of Sheen Tai Holdings Group's past earnings, revenue and cash flow.

What Does the ROCE Trend For Sheen Tai Holdings Group Tell Us?

In terms of Sheen Tai Holdings Group's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 0.6%, however they're now substantially lower than that as we saw above. 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. If these trends continue, we wouldn't expect Sheen Tai Holdings Group to turn into a multi-bagger.

On a related note, Sheen Tai Holdings Group has decreased its current liabilities to 3.0% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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 Bottom Line On Sheen Tai Holdings Group's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. In spite of that, the stock has delivered a 4.7% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Sheen Tai Holdings Group does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit concerning...

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.