Shriro Holdings (ASX:SHM) Is Investing Its Capital With Increasing Efficiency

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Shriro Holdings' (ASX:SHM) returns on capital, so let's have a look.

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. To calculate this metric for Shriro Holdings, this is the formula:

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

0.21 = AU$12m ÷ (AU$93m - AU$34m) (Based on the trailing twelve months to December 2023).

So, Shriro Holdings has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 16% earned by companies in a similar industry.

View our latest analysis for Shriro Holdings

roce

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're interested in investigating Shriro Holdings' past further, check out this free graph covering Shriro Holdings' past earnings, revenue and cash flow.

What Does the ROCE Trend For Shriro Holdings Tell Us?

You'd find it hard not to be impressed with the ROCE trend at Shriro Holdings. The data shows that returns on capital have increased by 42% over the trailing five years. The company is now earning AU$0.2 per dollar of capital employed. In regards to capital employed, Shriro Holdings appears to been achieving more with less, since the business is using 29% less capital to run its operation. Shriro Holdings may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 36% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

Our Take On Shriro Holdings' ROCE

From what we've seen above, Shriro Holdings has managed to increase it's returns on capital all the while reducing it's capital base. And a remarkable 162% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Shriro Holdings can keep these trends up, it could have a bright future ahead.

On a separate note, we've found 2 warning signs for Shriro Holdings you'll probably want to know about.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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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