Is Kenda Rubber Industrial (TPE:2106) Set To Make A Turnaround?

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. On that note, looking into Kenda Rubber Industrial (TPE:2106), we weren't too upbeat about how things were going.

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 Kenda Rubber Industrial:

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

0.057 = NT$1.8b ÷ (NT$42b - NT$10b) (Based on the trailing twelve months to September 2020).

Thus, Kenda Rubber Industrial has an ROCE of 5.7%. On its own that's a low return, but compared to the average of 4.7% generated by the Auto Components industry, it's much better.

View our latest analysis for Kenda Rubber Industrial

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kenda Rubber Industrial's ROCE against it's prior returns. If you'd like to look at how Kenda Rubber Industrial has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Kenda Rubber Industrial's ROCE Trending?

In terms of Kenda Rubber Industrial's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 13% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Kenda Rubber Industrial to turn into a multi-bagger.

In Conclusion...

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. And long term shareholders have watched their investments stay flat over the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we found 3 warning signs for Kenda Rubber Industrial (2 don't sit too well with us) you should be aware of.

While Kenda Rubber Industrial isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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