There's Been No Shortage Of Growth Recently For Cheng Shin Rubber Ind's (TWSE:2105) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Cheng Shin Rubber Ind's (TWSE:2105) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Cheng Shin Rubber Ind is:

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

0.097 = NT$11b ÷ (NT$142b - NT$26b) (Based on the trailing twelve months to March 2024).

Therefore, Cheng Shin Rubber Ind has an ROCE of 9.7%. In absolute terms, that's a low return but it's around the Auto Components industry average of 8.2%.

See 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 to see what analysts are forecasting going forward, you should check out our free analyst report for Cheng Shin Rubber Ind .

What Can We Tell From Cheng Shin Rubber Ind's ROCE Trend?

Cheng Shin Rubber Ind is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 92% over the last five years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

Our Take On Cheng Shin Rubber Ind's ROCE

As discussed above, Cheng Shin Rubber Ind appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 47% return over the last five years. In light of that, we think it's worth looking further into this stock because if Cheng Shin Rubber Ind can keep these trends up, it could have a bright future ahead.

One more thing, we've spotted 1 warning sign facing Cheng Shin Rubber Ind that you might find interesting.

While Cheng Shin Rubber Ind 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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