Stock Analysis

Are Investors Concerned With What's Going On At Sheng Yu Steel (TPE:2029)?

TWSE:2029
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When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. Having said that, after a brief look, Sheng Yu Steel (TPE:2029) we aren't filled with optimism, but let's investigate further.

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 Sheng Yu Steel:

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

0.014 = NT$127m ÷ (NT$9.7b - NT$731m) (Based on the trailing twelve months to September 2020).

Thus, Sheng Yu Steel has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 3.6%.

View our latest analysis for Sheng Yu Steel

roce
TSEC:2029 Return on Capital Employed March 10th 2021

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

So How Is Sheng Yu Steel's ROCE Trending?

There is reason to be cautious about Sheng Yu Steel, given the returns are trending downwards. To be more specific, the ROCE was 9.6% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Sheng Yu Steel becoming one if things continue as they have.

The Bottom Line

In summary, it's unfortunate that Sheng Yu Steel is generating lower returns from the same amount of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 43% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Sheng Yu Steel could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

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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