What Can The Trends At Shihlin Electric & Engineering (TPE:1503) Tell Us About Their Returns?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Shihlin Electric & Engineering (TPE:1503) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

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 Shihlin Electric & Engineering:

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

0.069 = NT$2.0b ÷ (NT$41b - NT$12b) (Based on the trailing twelve months to September 2020).

So, Shihlin Electric & Engineering has an ROCE of 6.9%. Even though it's in line with the industry average of 7.1%, it's still a low return by itself.

View our latest analysis for Shihlin Electric & Engineering

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

What Does the ROCE Trend For Shihlin Electric & Engineering Tell Us?

Shihlin Electric & Engineering is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 55% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

The Bottom Line

To sum it up, Shihlin Electric & Engineering is collecting higher returns from the same amount of capital, and that's impressive. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 49% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to continue researching Shihlin Electric & Engineering, you might be interested to know about the 1 warning sign that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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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