Capital Allocation Trends At Shan-Loong TransportationLtd (TPE:2616) Aren't Ideal

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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Shan-Loong TransportationLtd (TPE:2616), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Shan-Loong TransportationLtd:

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

0.05 = NT$387m ÷ (NT$10b - NT$2.4b) (Based on the trailing twelve months to December 2020).

So, Shan-Loong TransportationLtd has an ROCE of 5.0%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 8.6%.

Check out our latest analysis for Shan-Loong TransportationLtd

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

How Are Returns Trending?

On the surface, the trend of ROCE at Shan-Loong TransportationLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.0% from 6.5% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Shan-Loong TransportationLtd has done well to pay down its current liabilities to 23% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Shan-Loong TransportationLtd's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Shan-Loong TransportationLtd have fallen, meanwhile the business is employing more capital than it was five years ago. Since the stock has skyrocketed 113% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Shan-Loong TransportationLtd (of which 1 is concerning!) that you should know about.

While Shan-Loong TransportationLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

If you decide to trade Shan-Loong TransportationLtd, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.