The Trends At Shenmao Technology (TPE:3305) That You Should Know About

There are a few key trends to look for if we want to identify the next multi-bagger. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Shenmao Technology (TPE:3305) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Shenmao Technology is:

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

0.055 = NT$239m ÷ (NT$6.6b - NT$2.2b) (Based on the trailing twelve months to September 2020).

Therefore, Shenmao Technology has an ROCE of 5.5%. Ultimately, that's a low return and it under-performs the Machinery industry average of 9.3%.

Check out 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 want to delve into the historical earnings, revenue and cash flow of Shenmao Technology, check out these free graphs here.

What Can We Tell From Shenmao Technology's ROCE Trend?

Things have been pretty stable at Shenmao Technology, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Shenmao Technology doesn't end up being a multi-bagger in a few years time.

The Bottom Line

We can conclude that in regards to Shenmao Technology'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 58% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One final note, you should learn about the 4 warning signs we've spotted with Shenmao Technology (including 2 which are concerning) .

While Shenmao Technology 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. 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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