Tai Shing Electronics Components (GTSM:3426) May Have Issues Allocating Its Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Tai Shing Electronics Components (GTSM:3426) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Tai Shing Electronics Components is:

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

0.093 = NT$72m ÷ (NT$1.0b - NT$234m) (Based on the trailing twelve months to December 2020).

Thus, Tai Shing Electronics Components has an ROCE of 9.3%. In absolute terms, that's a low return but it's around the Electronic industry average of 11%.

View our latest analysis for Tai Shing Electronics Components

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

How Are Returns Trending?

When we looked at the ROCE trend at Tai Shing Electronics Components, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.3% from 12% five years ago. However it looks like Tai Shing Electronics Components might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Tai Shing Electronics Components' ROCE

To conclude, we've found that Tai Shing Electronics Components is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 46% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Tai Shing Electronics Components does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are potentially serious...

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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