What Do The Returns At Sinkang Industries (TPE:2032) Mean Going Forward?

What are the early trends we should look for to identify a stock that could 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Sinkang Industries (TPE:2032) and its trend of ROCE, we really liked what we saw.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Sinkang Industries:

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

0.036 = NT$67m ÷ (NT$2.1b - NT$226m) (Based on the trailing twelve months to September 2020).

Therefore, Sinkang Industries has an ROCE of 3.6%. Even though it's in line with the industry average of 3.6%, it's still a low return by itself.

Check out our latest analysis for Sinkang Industries

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'd like to look at how Sinkang Industries has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Shareholders will be relieved that Sinkang Industries has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 3.6%, which is always encouraging. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

Our Take On Sinkang Industries' ROCE

As discussed above, Sinkang Industries appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 95% return over the last five years. In light of that, we think it's worth looking further into this stock because if Sinkang Industries can keep these trends up, it could have a bright future ahead.

Sinkang Industries does have some risks though, and we've spotted 3 warning signs for Sinkang Industries that you might be interested in.

While Sinkang Industries 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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