The Returns On Capital At San Neng Group Holdings (TPE:6671) Don't Inspire Confidence

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after glancing at the trends within San Neng Group Holdings (TPE:6671), we weren't too hopeful.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for San Neng Group Holdings, this is the formula:

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

0.15 = NT$259m ÷ (NT$2.2b - NT$409m) (Based on the trailing twelve months to September 2020).

So, San Neng Group Holdings has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Consumer Durables industry average of 10% it's much better.

View our latest analysis for San Neng Group Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for San Neng Group Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of San Neng Group Holdings, check out these free graphs here.

What Does the ROCE Trend For San Neng Group Holdings Tell Us?

In terms of San Neng Group Holdings' historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 25% that they were earning four years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on San Neng Group Holdings becoming one if things continue as they have.

The Bottom Line

In summary, it's unfortunate that San Neng Group Holdings is generating lower returns from the same amount of capital. However the stock has delivered a 26% return to shareholders over the last year, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for San Neng Group Holdings (of which 1 is potentially serious!) that you should 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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