Is Chian Hsing Forging Industrial (GTSM:4528) Likely To Turn Things Around?

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. However, after investigating Chian Hsing Forging Industrial (GTSM:4528), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for Chian Hsing Forging Industrial:

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

0.096 = NT$262m ÷ (NT$3.8b - NT$1.1b) (Based on the trailing twelve months to September 2020).

So, Chian Hsing Forging Industrial has an ROCE of 9.6%. In absolute terms, that's a low return, but it's much better than the Auto Components industry average of 4.7%.

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.

So How Is Chian Hsing Forging Industrial's ROCE Trending?

When we looked at the ROCE trend at Chian Hsing Forging Industrial, we didn't gain much 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.

In Conclusion...

In summary, we're somewhat concerned by Chian Hsing Forging Industrial's diminishing returns on increasing amounts of capital. Investors must expect better things on the horizon though because the stock has risen 18% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Chian Hsing Forging Industrial does have some risks, we noticed 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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