The Returns On Capital At Cheng Shin Rubber Ind (TPE:2105) Don't Inspire Confidence

What underlying fundamental trends can indicate that a company might be in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, Cheng Shin Rubber Ind (TPE:2105) we aren't filled with optimism, but let's investigate further.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Cheng Shin Rubber Ind, this is the formula:

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

0.057 = NT$6.5b ÷ (NT$150b - NT$36b) (Based on the trailing twelve months to September 2020).

Therefore, Cheng Shin Rubber Ind has an ROCE of 5.7%. 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 Cheng Shin Rubber Ind

Above you can see how the current ROCE for Cheng Shin Rubber Ind compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Cheng Shin Rubber Ind here for free.

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Cheng Shin Rubber Ind. About five years ago, returns on capital were 15%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Cheng Shin Rubber Ind becoming one if things continue as they have.

The Bottom Line On Cheng Shin Rubber Ind's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. It should come as no surprise then that the stock has fallen 16% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Like most companies, Cheng Shin Rubber Ind does come with some risks, and we've found 2 warning signs that you should be aware of.

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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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