What We Make Of Shinkong TextileLtd's (TPE:1419) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Shinkong TextileLtd (TPE:1419) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Shinkong TextileLtd is:

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

0.015 = NT$144m ÷ (NT$13b - NT$3.4b) (Based on the trailing twelve months to September 2020).

So, Shinkong TextileLtd has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Luxury industry average of 4.0%.

See our latest analysis for Shinkong TextileLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Shinkong TextileLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Shinkong TextileLtd's ROCE Trend?

Shareholders will be relieved that Shinkong TextileLtd has broken into profitability. The company now earns 1.5% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Shinkong TextileLtd has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.

The Bottom Line

To bring it all together, Shinkong TextileLtd has done well to increase the returns it's generating from its capital employed. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 35% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

One more thing, we've spotted 1 warning sign facing Shinkong TextileLtd that you might find interesting.

While Shinkong TextileLtd 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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