Can Shian Yih Electronic IndustryLtd (GTSM:3531) Continue To Grow Its Returns On Capital?

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. Speaking of which, we noticed some great changes in Shian Yih Electronic IndustryLtd's (GTSM:3531) returns on capital, so let's have a look.

Understanding 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. Analysts use this formula to calculate it for Shian Yih Electronic IndustryLtd:

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

0.04 = NT$77m ÷ (NT$2.5b - NT$565m) (Based on the trailing twelve months to September 2020).

So, Shian Yih Electronic IndustryLtd has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 11%.

View our latest analysis for Shian Yih Electronic IndustryLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shian Yih Electronic IndustryLtd's ROCE against it's prior returns. If you're interested in investigating Shian Yih Electronic IndustryLtd's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

We're delighted to see that Shian Yih Electronic IndustryLtd is reaping rewards from its investments and has now broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 4.0% on its capital. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

On a related note, the company's ratio of current liabilities to total assets has decreased to 23%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Bottom Line

To bring it all together, Shian Yih Electronic IndustryLtd has done well to increase the returns it's generating from its capital employed. And with a respectable 93% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Shian Yih Electronic IndustryLtd can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 3 warning signs with Shian Yih Electronic IndustryLtd and understanding these should be part of your investment process.

While Shian Yih Electronic IndustryLtd 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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