Here's What To Make Of Kinpo Electronics' (TPE:2312) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. 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.

What is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Kinpo Electronics is:

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).

So, Kinpo Electronics has an ROCE of 0.7%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 10.0%.

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?

On the surface, the trend of ROCE at Kinpo Electronics doesn't inspire 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 may take some time before the company starts to see any change in earnings from these investments.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 59%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. 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 On Kinpo Electronics' ROCE

Bringing it all together, while we're somewhat encouraged by Kinpo Electronics' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 59% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you want to know some of the risks facing Kinpo Electronics we've found 5 warning signs (2 make us uncomfortable!) that you should be aware of before investing here.

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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