Here's What We Make Of Sinmag Equipment's (GTSM:1580) Returns On Capital

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, Sinmag Equipment (GTSM:1580) we aren't filled with optimism, but let's investigate further.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Sinmag Equipment, this is the formula:

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

0.22 = NT$496m ÷ (NT$3.1b - NT$895m) (Based on the trailing twelve months to September 2020).

Therefore, Sinmag Equipment has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Machinery industry average of 9.3%.

View our latest analysis for Sinmag Equipment

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Sinmag Equipment, check out these free graphs here.

What Does the ROCE Trend For Sinmag Equipment Tell Us?

In terms of Sinmag Equipment's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 36%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Sinmag Equipment becoming one if things continue as they have.

The Bottom Line

In summary, it's unfortunate that Sinmag Equipment is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 15% 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.

Sinmag Equipment does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit concerning...

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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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