Returns On Capital At Shinkong Synthetic Fibers (TPE:1409) Paint An Interesting Picture

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Shinkong Synthetic Fibers (TPE:1409) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Shinkong Synthetic Fibers is:

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

0.064 = NT$3.8b ÷ (NT$175b - NT$116b) (Based on the trailing twelve months to September 2020).

So, Shinkong Synthetic Fibers has an ROCE of 6.4%. On its own, that's a low figure but it's around the 6.7% average generated by the Chemicals industry.

Check out our latest analysis for Shinkong Synthetic Fibers

In the above chart we have measured Shinkong Synthetic Fibers' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

There are better returns on capital out there than what we're seeing at Shinkong Synthetic Fibers. Over the past five years, ROCE has remained relatively flat at around 6.4% and the business has deployed 51% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a separate but related note, it's important to know that Shinkong Synthetic Fibers has a current liabilities to total assets ratio of 66%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

Long story short, while Shinkong Synthetic Fibers has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 70% 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.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Shinkong Synthetic Fibers (of which 1 doesn't sit too well with us!) that you should know about.

While Shinkong Synthetic Fibers may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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