To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at Shun Ho Holdings (HKG:253), we've spotted some signs that it could be struggling, so let's investigate.
Return On Capital Employed (ROCE): What Is It?
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 Shun Ho Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.011 = HK$105m ÷ (HK$9.9b - HK$288m) (Based on the trailing twelve months to December 2023).
So, Shun Ho Holdings has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 6.2%.
Check out our latest analysis for Shun Ho Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for Shun Ho Holdings' ROCE against it's prior returns. If you're interested in investigating Shun Ho Holdings' past further, check out this free graph covering Shun Ho Holdings' past earnings, revenue and cash flow.
The Trend Of ROCE
There is reason to be cautious about Shun Ho Holdings, given the returns are trending downwards. About five years ago, returns on capital were 3.6%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 Shun Ho Holdings becoming one if things continue as they have.
What We Can Learn From Shun Ho Holdings' ROCE
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. It should come as no surprise then that the stock has fallen 67% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
One more thing, we've spotted 1 warning sign facing Shun Ho Holdings that you might find interesting.
While Shun Ho 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.
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