Will Shin Zu Shing (TPE:3376) Multiply In Value Going Forward?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. That's why when we briefly looked at Shin Zu Shing's (TPE:3376) ROCE trend, we were pretty happy with what we saw.

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

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. Analysts use this formula to calculate it for Shin Zu Shing:

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

0.16 = NT$2.5b ÷ (NT$22b - NT$5.9b) (Based on the trailing twelve months to September 2020).

Thus, Shin Zu Shing has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 9.3% generated by the Machinery industry.

Check out our latest analysis for Shin Zu Shing

In the above chart we have measured Shin Zu Shing's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Shin Zu Shing here for free.

So How Is Shin Zu Shing's ROCE Trending?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 33% more capital in the last five years, and the returns on that capital have remained stable at 16%. 16% is a pretty standard return, and it provides some comfort knowing that Shin Zu Shing has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

The Bottom Line On Shin Zu Shing's ROCE

The main thing to remember is that Shin Zu Shing has proven its ability to continually reinvest at respectable rates of return. And given the stock has only risen 36% over the last five years, we'd suspect the market is beginning to recognize these trends. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.

One more thing, we've spotted 2 warning signs facing Shin Zu Shing that you might find interesting.

While Shin Zu Shing 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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