Stock Analysis

Is Sheng Yu Steel (TPE:2029) Headed For Trouble?

TWSE:2029
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If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after glancing at the trends within Sheng Yu Steel (TPE:2029), we weren't too hopeful.

Understanding Return On Capital Employed (ROCE)

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. 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).

Therefore, 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%.

Check out our latest analysis for Sheng Yu Steel

roce
TSEC:2029 Return on Capital Employed December 10th 2020

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're interested in investigating Sheng Yu Steel's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Sheng Yu Steel Tell Us?

We are a bit worried about the trend of returns on capital at Sheng Yu Steel. Unfortunately the returns on capital have diminished from the 9.6% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Sheng Yu Steel to turn into a multi-bagger.

Our Take On Sheng Yu Steel's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Yet despite these concerning fundamentals, the stock has performed strongly with a 59% return over the last five years, so investors appear very optimistic. 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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