San Lien Technology (GTSM:5493) Is Finding It Tricky To Allocate Its Capital

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. Having said that, after a brief look, San Lien Technology (GTSM:5493) we aren't filled with optimism, but let's investigate further.

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 San Lien Technology is:

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

0.088 = NT$219m ÷ (NT$3.8b - NT$1.3b) (Based on the trailing twelve months to December 2020).

So, San Lien Technology has an ROCE of 8.8%. In absolute terms, that's a low return but it's around the Semiconductor industry average of 11%.

See our latest analysis for San Lien Technology

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 San Lien Technology, check out these free graphs here.

So How Is San Lien Technology's ROCE Trending?

There is reason to be cautious about San Lien Technology, given the returns are trending downwards. About five years ago, returns on capital were 11%, 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. If these trends continue, we wouldn't expect San Lien Technology to turn into a multi-bagger.

What We Can Learn From San Lien Technology's ROCE

In summary, it's unfortunate that San Lien Technology is generating lower returns from the same amount of capital. However the stock has delivered a 81% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you'd like to know about the risks facing San Lien Technology, we've discovered 3 warning signs that you should be aware of.

While San Lien Technology 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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