Our Take On The Returns On Capital At G-SHANK Enterprise (TPE:2476)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at G-SHANK Enterprise (TPE:2476) and its ROCE trend, we weren't exactly thrilled.

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

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. Analysts use this formula to calculate it for G-SHANK Enterprise:

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

0.083 = NT$485m ÷ (NT$8.0b - NT$2.2b) (Based on the trailing twelve months to September 2020).

Therefore, G-SHANK Enterprise has an ROCE of 8.3%. On its own, that's a low figure but it's around the 9.4% average generated by the Machinery industry.

Check out our latest analysis for G-SHANK Enterprise

Historical performance is a great place to start when researching a stock so above you can see the gauge for G-SHANK Enterprise's ROCE against it's prior returns. If you're interested in investigating G-SHANK Enterprise's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For G-SHANK Enterprise Tell Us?

Over the past five years, G-SHANK Enterprise's ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if G-SHANK Enterprise doesn't end up being a multi-bagger in a few years time.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 27% of total assets, this reported ROCE would probably be less than8.3% because total capital employed would be higher.The 8.3% ROCE could be even lower if current liabilities weren't 27% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.

In Conclusion...

We can conclude that in regards to G-SHANK Enterprise's returns on capital employed and the trends, there isn't much change to report on. Although the market must be expecting these trends to improve because the stock has gained 67% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

G-SHANK Enterprise does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is significant...

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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