Shenmao Technology (TPE:3305) Shareholders Will Want The ROCE Trajectory To Continue

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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Shenmao Technology (TPE:3305) so let's look a bit deeper.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Shenmao Technology, this is the formula:

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

0.057 = NT$280m ÷ (NT$6.6b - NT$1.7b) (Based on the trailing twelve months to December 2020).

So, Shenmao Technology has an ROCE of 5.7%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 9.4%.

See our latest analysis for Shenmao Technology

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

The Trend Of ROCE

Shenmao Technology's ROCE growth is quite impressive. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 29% in that same time. 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. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

In Conclusion...

As discussed above, Shenmao Technology appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Shenmao Technology (of which 2 make us uncomfortable!) that you should know about.

While Shenmao Technology 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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