Shenzhou International Group Holdings’ (HKG:2313) Returns Have Hit A Wall

If you’re looking for a multi-bagger, there’s a few things to keep an eye out for. In a perfect world, we’d like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So, when we ran our eye over Shenzhou International Group Holdings’ (HKG:2313) trend of ROCE, we liked what we saw.

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. Analysts use this formula to calculate it for Shenzhou International Group Holdings:

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

0.19 = CN¥5.4b ÷ (CN¥37b – CN¥8.9b) (Based on the trailing twelve months to December 2020).

Thus, Shenzhou International Group Holdings has an ROCE of 19%. On its own, that’s a standard return, however it’s much better than the 7.9% generated by the Luxury industry.

Check out our latest analysis for Shenzhou International Group Holdings

SEHK:2313 Return on Capital Employed August 1st 2021

Above you can see how the current ROCE for Shenzhou International Group Holdings compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Shenzhou International Group Holdings’ ROCE Trend?

The trend of ROCE doesn’t stand out much, but returns on a whole are decent. The company has employed 73% more capital in the last five years, and the returns on that capital have remained stable at 19%. Since 19% is a moderate ROCE though, it’s good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On another note, while the change in ROCE trend might not scream for attention, it’s interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn’t increased to 24% of total assets, this reported ROCE would probably be less than19% because total capital employed would be higher.The 19% ROCE could be even lower if current liabilities weren’t 24% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.

The Key Takeaway

The main thing to remember is that Shenzhou International Group Holdings has proven its ability to continually reinvest at respectable rates of return. And long term investors would be thrilled with the 360% return they’ve received over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

If you’re still interested in Shenzhou International Group Holdings it’s worth checking out our FREE intrinsic value approximation to see if it’s trading at an attractive price in other respects.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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