Can Sunplus Technology (TPE:2401) Turn Things Around?

What underlying fundamental trends can indicate that a company might be in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after we looked into Sunplus Technology (TPE:2401), the trends above didn't look too great.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Sunplus Technology, this is the formula:

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

0.033 = NT$340m ÷ (NT$12b - NT$1.7b) (Based on the trailing twelve months to September 2020).

Thus, Sunplus Technology has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 10%.

View our latest analysis for Sunplus Technology

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

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about Sunplus Technology, given the returns are trending downwards. To be more specific, the ROCE was 4.2% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Sunplus Technology becoming one if things continue as they have.

What We Can Learn From Sunplus Technology's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. However the stock has delivered a 88% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you want to know some of the risks facing Sunplus Technology we've found 2 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

While Sunplus 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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