Should We Be Excited About The Trends Of Returns At ShunSin Technology Holdings (TPE:6451)?

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at ShunSin Technology Holdings (TPE:6451), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

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. To calculate this metric for ShunSin Technology Holdings, this is the formula:

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

0.14 = NT$874m ÷ (NT$12b - NT$5.8b) (Based on the trailing twelve months to September 2020).

Therefore, ShunSin Technology Holdings has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Semiconductor industry average of 11% it's much better.

Check out our latest analysis for ShunSin Technology Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for ShunSin Technology Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of ShunSin Technology Holdings, check out these free graphs here.

What Can We Tell From ShunSin Technology Holdings' ROCE Trend?

Things have been pretty stable at ShunSin Technology Holdings, with its capital employed and returns on that capital staying somewhat the same for the last five years. 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. With that in mind, unless investment picks up again in the future, we wouldn't expect ShunSin Technology Holdings to be a multi-bagger going forward.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 47% of total assets, this reported ROCE would probably be less than14% because total capital employed would be higher.The 14% ROCE could be even lower if current liabilities weren't 47% of total assets, because the the formula would show a larger base of total capital employed. So with current liabilities at such high levels, this effectively means the likes of suppliers or short-term creditors are funding a meaningful part of the business, which in some instances can bring some risks.

The Bottom Line

In a nutshell, ShunSin Technology Holdings has been trudging along with the same returns from the same amount of capital over the last five years. Unsurprisingly, the stock has only gained 34% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

ShunSin Technology Holdings does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

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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