What underlying fundamental trends can indicate that a company might be in decline? 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 the company is producing less profit from its investments and its total assets are decreasing. So after we looked into Shriro Holdings (ASX:SHM), the trends above didn’t look too great.
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If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Shriro Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.12 = AU$8.1m ÷ (AU$78m – AU$14m) (Based on the trailing twelve months to December 2024).
Thus, Shriro Holdings has an ROCE of 12%. By itself that’s a normal return on capital and it’s in line with the industry’s average returns of 12%.
See our latest analysis for Shriro Holdings
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you’d like to look at how Shriro Holdings has performed in the past in other metrics, you can view this free graph of Shriro Holdings’ past earnings, revenue and cash flow.
In terms of Shriro Holdings’ historical ROCE movements, the trend doesn’t inspire confidence. To be more specific, the ROCE was 16% five years ago, but since then it has dropped noticeably. On top of that, it’s worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren’t typically conducive to creating a multi-bagger, we wouldn’t hold our breath on Shriro Holdings becoming one if things continue as they have.
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. Yet despite these poor fundamentals, the stock has gained a huge 155% over the last five years, so investors appear very optimistic. Regardless, we don’t feel too comfortable with the fundamentals so we’d be steering clear of this stock for now.