Shenzhen International Holdings (HKG:152) Hasn't Managed To Accelerate Its Returns

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Shenzhen International Holdings (HKG:152) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Shenzhen International Holdings:

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

0.036 = HK$3.1b ÷ (HK$133b - HK$49b) (Based on the trailing twelve months to December 2022).

Thus, Shenzhen International Holdings has an ROCE of 3.6%. Ultimately, that's a low return and it under-performs the Infrastructure industry average of 5.7%.

Check out our latest analysis for Shenzhen International Holdings

Above you can see how the current ROCE for Shenzhen International Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Shenzhen International Holdings.

SWOT Analysis for Shenzhen International Holdings

The Trend Of ROCE

In terms of Shenzhen International Holdings' historical ROCE trend, it doesn't exactly demand attention. The company has employed 29% more capital in the last five years, and the returns on that capital have remained stable at 3.6%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 36% of total assets, this reported ROCE would probably be less than3.6% because total capital employed would be higher.The 3.6% ROCE could be even lower if current liabilities weren't 36% of total assets, because the the formula would show a larger base of total capital employed. So while current liabilities isn't high right now, keep an eye out in case it increases further, because this can introduce some elements of risk.

The Bottom Line On Shenzhen International Holdings' ROCE

In conclusion, Shenzhen International Holdings has been investing more capital into the business, but returns on that capital haven't increased. And in the last five years, the stock has given away 44% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One final note, you should learn about the 5 warning signs we've spotted with Shenzhen International Holdings (including 1 which is a bit concerning) .

While Shenzhen International 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.