Are Investors Concerned With What's Going On At TSRC (TPE:2103)?

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. On that note, looking into TSRC (TPE:2103), we weren't too upbeat about how things were going.

What is 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. The formula for this calculation on TSRC is:

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

0.037 = NT$773m ÷ (NT$29b - NT$7.9b) (Based on the trailing twelve months to September 2020).

Therefore, TSRC has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 6.8%.

View our latest analysis for TSRC

In the above chart we have measured TSRC's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering TSRC here for free.

The Trend Of ROCE

In terms of TSRC's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 7.4%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on TSRC becoming one if things continue as they have.

The Bottom Line

In summary, it's unfortunate that TSRC is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 7.9% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One more thing: We've identified 2 warning signs with TSRC (at least 1 which can't be ignored) , and understanding these would certainly be useful.

While TSRC 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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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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