SH Group (Holdings) (HKG:1637) Could Be Struggling To Allocate Capital

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. 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. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. Having said that, after a brief look, SH Group (Holdings) (HKG:1637) we aren't filled with optimism, but let's investigate further.

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What Is 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 SH Group (Holdings), this is the formula:

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

0.0033 = HK$763k ÷ (HK$378m - HK$143m) (Based on the trailing twelve months to March 2025).

Therefore, SH Group (Holdings) has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Construction industry average of 5.1%.

Check out our latest analysis for SH Group (Holdings)

Historical performance is a great place to start when researching a stock so above you can see the gauge for SH Group (Holdings)'s ROCE against it's prior returns. If you're interested in investigating SH Group (Holdings)'s past further, check out this free graph covering SH Group (Holdings)'s past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of SH Group (Holdings)'s historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 13%, 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 SH Group (Holdings) becoming one if things continue as they have.

In Conclusion...

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. Investors haven't taken kindly to these developments, since the stock has declined 21% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

SH Group (Holdings) does have some risks, we noticed 3 warning signs (and 1 which can't be ignored) we think you should know about.

While SH Group (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.