Has Kinpo Electronics (TPE:2312) Got What It Takes To Become A Multi-Bagger?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 briefly looking over the numbers, we don't think Kinpo Electronics (TPE:2312) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Kinpo Electronics, this is the formula:

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

0.0072 = NT$300m ÷ (NT$101b - NT$59b) (Based on the trailing twelve months to September 2020).

Thus, Kinpo Electronics has an ROCE of 0.7%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 10%.

View our latest analysis for Kinpo Electronics

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kinpo Electronics' ROCE against it's prior returns. If you'd like to look at how Kinpo Electronics has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Kinpo Electronics Tell Us?

When we looked at the ROCE trend at Kinpo Electronics, we didn't gain much confidence. Around five years ago the returns on capital were 3.5%, but since then they've fallen to 0.7%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 59%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 0.7%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

The Bottom Line

To conclude, we've found that Kinpo Electronics is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 30% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for Kinpo Electronics (of which 2 are a bit concerning!) that you should know about.

While Kinpo Electronics 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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