The Returns At Kian Shen (TPE:1525) Provide Us With Signs Of What's To Come

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Kian Shen (TPE:1525) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Kian Shen, this is the formula:

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

0.0015 = NT$6.6m ÷ (NT$5.0b - NT$550m) (Based on the trailing twelve months to September 2020).

Therefore, Kian Shen has an ROCE of 0.1%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 4.7%.

Check out our latest analysis for Kian Shen

In the above chart we have measured Kian Shen's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Kian Shen.

What Can We Tell From Kian Shen's ROCE Trend?

In terms of Kian Shen's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 0.1% from 1.1% five years ago. 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.

In Conclusion...

We're a bit apprehensive about Kian Shen because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors haven't taken kindly to these developments, since the stock has declined 16% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to know some of the risks facing Kian Shen we've found 2 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

While Kian Shen may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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