Is This A Sign of Things To Come At Hanpin Electron (TPE:2488)?

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after we looked into Hanpin Electron (TPE:2488), the trends above didn't look too great.

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 Hanpin Electron, this is the formula:

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

0.075 = NT$175m ÷ (NT$3.3b - NT$1.0b) (Based on the trailing twelve months to September 2020).

So, Hanpin Electron has an ROCE of 7.5%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 10%.

Check out our latest analysis for Hanpin Electron

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hanpin Electron's ROCE against it's prior returns. If you're interested in investigating Hanpin Electron's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Hanpin Electron's ROCE Trend?

We are a bit worried about the trend of returns on capital at Hanpin Electron. Unfortunately the returns on capital have diminished from the 12% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Hanpin Electron to turn into a multi-bagger.

In Conclusion...

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. However the stock has delivered a 46% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Hanpin Electron (of which 1 makes us a bit uncomfortable!) that you should know about.

While Hanpin Electron 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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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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