These Return Metrics Don't Make San Fang Chemical Industry (TPE:1307) Look Too Strong

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. On that note, looking into San Fang Chemical Industry (TPE:1307), we weren't too upbeat about how things were going.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on San Fang Chemical Industry is:

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

0.043 = NT$498m ÷ (NT$15b - NT$3.8b) (Based on the trailing twelve months to December 2020).

Thus, San Fang Chemical Industry has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 7.7%.

View our latest analysis for San Fang Chemical Industry

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

So How Is San Fang Chemical Industry's ROCE Trending?

We are a bit worried about the trend of returns on capital at San Fang Chemical Industry. To be more specific, the ROCE was 13% five years ago, but since then it has dropped noticeably. 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 San Fang Chemical Industry to turn into a multi-bagger.

In Conclusion...

In summary, it's unfortunate that San Fang Chemical Industry is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 23% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with San Fang Chemical Industry (including 1 which is a bit concerning) .

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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