Some Investors May Be Worried About Shin Zu Shing's (TWSE:3376) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Although, when we looked at Shin Zu Shing (TWSE:3376), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Shin Zu Shing, this is the formula:

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

0.072 = NT$1.4b ÷ (NT$24b - NT$5.1b) (Based on the trailing twelve months to September 2024).

Therefore, Shin Zu Shing has an ROCE of 7.2%. On its own, that's a low figure but it's around the 9.0% average 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're interested, you can view the analysts predictions in our free analyst report for Shin Zu Shing .

What Does the ROCE Trend For Shin Zu Shing Tell Us?

The trend of ROCE doesn't look fantastic because it's fallen from 13% five years ago, while the business's capital employed increased by 40%. That being said, Shin Zu Shing raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Shin Zu Shing might not have received a full period of earnings contribution from it.

Our Take On Shin Zu Shing's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Shin Zu Shing. And long term investors must be optimistic going forward because the stock has returned a huge 153% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

On a separate note, we've found 1 warning sign for Shin Zu Shing you'll probably want to know about.

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. 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.