Here's What's Concerning About Chian Hsing Forging Industrial's (GTSM:4528) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Chian Hsing Forging Industrial (GTSM:4528) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Chian Hsing Forging Industrial is:

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

0.10 = NT$279m ÷ (NT$4.0b - NT$1.2b) (Based on the trailing twelve months to December 2020).

Therefore, Chian Hsing Forging Industrial has an ROCE of 10.0%. On its own that's a low return, but compared to the average of 4.3% generated by the Auto Components industry, it's much better.

Check out our latest analysis for Chian Hsing Forging Industrial

In the above chart we have measured Chian Hsing Forging Industrial's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Chian Hsing Forging Industrial here for free.

What Can We Tell From Chian Hsing Forging Industrial's ROCE Trend?

On the surface, the trend of ROCE at Chian Hsing Forging Industrial doesn't inspire confidence. To be more specific, ROCE has fallen from 17% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. 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.

Our Take On Chian Hsing Forging Industrial's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Chian Hsing Forging Industrial have fallen, meanwhile the business is employing more capital than it was five years ago. Investors must expect better things on the horizon though because the stock has risen 20% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you want to know some of the risks facing Chian Hsing Forging Industrial we've found 3 warning signs (1 is potentially serious!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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