What Do The Returns On Capital At Shih Her Technologies (GTSM:3551) Tell Us?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. However, after briefly looking over the numbers, we don't think Shih Her Technologies (GTSM:3551) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Shih Her Technologies:

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

0.098 = NT$337m ÷ (NT$4.0b - NT$549m) (Based on the trailing twelve months to September 2020).

Thus, Shih Her Technologies has an ROCE of 9.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 10%.

Check out our latest analysis for Shih Her Technologies

In the above chart we have measured Shih Her Technologies' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Shih Her Technologies.

The Trend Of ROCE

Over the past five years, Shih Her Technologies' ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at Shih Her Technologies in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

In Conclusion...

We can conclude that in regards to Shih Her Technologies' returns on capital employed and the trends, there isn't much change to report on. Since the stock has gained an impressive 92% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Like most companies, Shih Her Technologies does come with some risks, and we've found 1 warning sign that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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