The Return Trends At Song Shang ElectronicsLtd (GTSM:6156) Look Promising

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Song Shang ElectronicsLtd (GTSM:6156) looks quite promising in regards to its trends of return on capital.

Understanding 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. To calculate this metric for Song Shang ElectronicsLtd, this is the formula:

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

0.097 = NT$189m ÷ (NT$3.9b - NT$1.9b) (Based on the trailing twelve months to December 2020).

So, Song Shang ElectronicsLtd has an ROCE of 9.7%. In absolute terms, that's a low return but it's around the Electronic industry average of 11%.

Check out our latest analysis for Song Shang ElectronicsLtd

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 Song Shang ElectronicsLtd, check out these free graphs here.

What Can We Tell From Song Shang ElectronicsLtd's ROCE Trend?

Song Shang ElectronicsLtd is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 22% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

On a separate but related note, it's important to know that Song Shang ElectronicsLtd has a current liabilities to total assets ratio of 50%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

To sum it up, Song Shang ElectronicsLtd is collecting higher returns from the same amount of capital, and that's impressive. And with a respectable 43% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Song Shang ElectronicsLtd can keep these trends up, it could have a bright future ahead.

One final note, you should learn about the 3 warning signs we've spotted with Song Shang ElectronicsLtd (including 1 which is 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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This article by Simply Wall St is general in nature. 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.
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