Slowing Rates Of Return At Shihlin Electric & Engineering (TWSE:1503) Leave Little Room For Excitement

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Shihlin Electric & Engineering (TWSE:1503), we don't think it's current trends fit the mold of a multi-bagger.

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)

0.056 = NT$2.4b ÷ (NT$60b - NT$17b) (Based on the trailing twelve months to March 2024).

Thus, Shihlin Electric & Engineering has an ROCE of 5.6%. On its own, that's a low figure but it's around the 6.8% average generated by the Electrical industry.

View our latest analysis for Shihlin Electric & Engineering

Above you can see how the current ROCE for Shihlin Electric & Engineering compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Shihlin Electric & Engineering .

The Trend Of ROCE

The returns on capital haven't changed much for Shihlin Electric & Engineering in recent years. The company has consistently earned 5.6% for the last five years, and the capital employed within the business has risen 56% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

What We Can Learn From Shihlin Electric & Engineering's ROCE

In conclusion, Shihlin Electric & Engineering has been investing more capital into the business, but returns on that capital haven't increased. Yet to long term shareholders the stock has gifted them an incredible 445% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a final note, we've found 1 warning sign for Shihlin Electric & Engineering that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com