What We Make Of Sinon's (TPE:1712) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Sinon (TPE:1712) looks quite promising in regards to its trends of return on capital.

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

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 Sinon:

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

0.12 = NT$1.1b ÷ (NT$15b - NT$5.8b) (Based on the trailing twelve months to September 2020).

Therefore, Sinon has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 6.9% generated by the Chemicals industry.

See our latest analysis for Sinon

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

What Can We Tell From Sinon's ROCE Trend?

Sinon is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 57% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

The Bottom Line

To bring it all together, Sinon has done well to increase the returns it's generating from its capital employed. Since the stock has returned a staggering 106% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a separate note, we've found 1 warning sign for Sinon you'll probably want to know about.

While Sinon 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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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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