Tai Sin Electric (SGX:500) Will Be Hoping To Turn Its Returns On Capital Around

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Tai Sin Electric (SGX:500) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Tai Sin Electric:

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

0.081 = S$17m ÷ (S$270m - S$61m) (Based on the trailing twelve months to December 2020).

So, Tai Sin Electric has an ROCE of 8.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.4%.

See our latest analysis for Tai Sin Electric

Historical performance is a great place to start when researching a stock so above you can see the gauge for Tai Sin Electric's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Tai Sin Electric, check out these free graphs here.

The Trend Of ROCE

In terms of Tai Sin Electric's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 12% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line On Tai Sin Electric's ROCE

We're a bit apprehensive about Tai Sin Electric because despite more capital being deployed in the business, returns on that capital and sales have both fallen. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 45% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One more thing: We've identified 3 warning signs with Tai Sin Electric (at least 1 which is significant) , and understanding them would certainly be useful.

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This article by Simply Wall St is general in nature. 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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