Investors Could Be Concerned With Tsann Kuen EnterpriseLtd's (TPE:2430) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Tsann Kuen EnterpriseLtd (TPE:2430) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is 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 Tsann Kuen EnterpriseLtd:

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

0.048 = NT$424m ÷ (NT$14b - NT$5.2b) (Based on the trailing twelve months to December 2020).

Thus, Tsann Kuen EnterpriseLtd has an ROCE of 4.8%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 8.9%.

View our latest analysis for Tsann Kuen EnterpriseLtd

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 want to delve into the historical earnings, revenue and cash flow of Tsann Kuen EnterpriseLtd, check out these free graphs here.

So How Is Tsann Kuen EnterpriseLtd's ROCE Trending?

When we looked at the ROCE trend at Tsann Kuen EnterpriseLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.8% from 10% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Tsann Kuen EnterpriseLtd has done well to pay down its current liabilities to 37% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Tsann Kuen EnterpriseLtd's ROCE

To conclude, we've found that Tsann Kuen EnterpriseLtd is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 52% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Tsann Kuen EnterpriseLtd does have some risks, we noticed 3 warning signs (and 1 which is concerning) we think you should know about.

While Tsann Kuen EnterpriseLtd 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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