Be Wary Of HsinLi Chemical Industrial (GTSM:4303) And Its Returns On Capital

What underlying fundamental trends can indicate that a company might be in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within HsinLi Chemical Industrial (GTSM:4303), we weren't too hopeful.

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 HsinLi Chemical Industrial, this is the formula:

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

0.01 = NT$9.5m ÷ (NT$1.2b - NT$251m) (Based on the trailing twelve months to December 2020).

Thus, HsinLi Chemical Industrial has an ROCE of 1.0%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 7.7%.

See our latest analysis for HsinLi Chemical Industrial

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 HsinLi Chemical Industrial has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is HsinLi Chemical Industrial's ROCE Trending?

In terms of HsinLi Chemical Industrial's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 5.2%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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. If these trends continue, we wouldn't expect HsinLi Chemical Industrial to turn into a multi-bagger.

What We Can Learn From HsinLi Chemical Industrial's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 164%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you'd like to know more about HsinLi Chemical Industrial, we've spotted 2 warning signs, and 1 of them can't be ignored.

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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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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