Kinsus Interconnect Technology (TWSE:3189) May Have Issues Allocating Its Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. In light of that, when we looked at Kinsus Interconnect Technology (TWSE:3189) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Kinsus Interconnect Technology:

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

0.016 = NT$1.0b ÷ (NT$78b - NT$14b) (Based on the trailing twelve months to December 2023).

Thus, Kinsus Interconnect Technology has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 8.1%.

View our latest analysis for Kinsus Interconnect Technology

Above you can see how the current ROCE for Kinsus Interconnect Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Kinsus Interconnect Technology .

How Are Returns Trending?

When we looked at the ROCE trend at Kinsus Interconnect Technology, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.6% from 2.4% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From Kinsus Interconnect Technology's ROCE

In summary, we're somewhat concerned by Kinsus Interconnect Technology's diminishing returns on increasing amounts of capital. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 117%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a separate note, we've found 1 warning sign for Kinsus Interconnect Technology you'll probably want to know about.

While Kinsus Interconnect Technology 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.