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

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Shinkong Synthetic Fibers (TPE:1409), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Shinkong Synthetic Fibers:

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

0.063 = NT$3.7b ÷ (NT$175b - NT$116b) (Based on the trailing twelve months to September 2020).

Therefore, Shinkong Synthetic Fibers has an ROCE of 6.3%. On its own, that's a low figure but it's around the 6.8% average generated by the Chemicals industry.

See our latest analysis for Shinkong Synthetic Fibers

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're interested in investigating Shinkong Synthetic Fibers' past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

The returns on capital haven't changed much for Shinkong Synthetic Fibers in recent years. The company has employed 51% more capital in the last five years, and the returns on that capital have remained stable at 6.3%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

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.

What We Can Learn From Shinkong Synthetic Fibers' ROCE

In conclusion, Shinkong Synthetic Fibers has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 97% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you'd like to know more about Shinkong Synthetic Fibers, we've spotted 4 warning signs, and 1 of them makes us a bit uncomfortable.

While Shinkong Synthetic Fibers 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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