Will Song Shang ElectronicsLtd (GTSM:6156) Multiply In Value Going Forward?

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Song Shang ElectronicsLtd (GTSM:6156) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. Analysts use this formula to calculate it for Song Shang ElectronicsLtd:

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

0.091 = NT$178m ÷ (NT$3.6b - NT$1.7b) (Based on the trailing twelve months to September 2020).

Thus, Song Shang ElectronicsLtd has an ROCE of 9.1%. In absolute terms, that's a low return but it's around the Electronic industry average of 10%.

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.

So How Is Song Shang ElectronicsLtd's ROCE Trending?

Over the past five years, Song Shang ElectronicsLtd's ROCE and capital employed have both remained mostly flat. 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. So unless we see a substantial change at Song Shang ElectronicsLtd in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

Another thing to note, Song Shang ElectronicsLtd has a high ratio of current liabilities to total assets of 46%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

In summary, Song Shang ElectronicsLtd isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Although the market must be expecting these trends to improve because the stock has gained 77% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Song Shang ElectronicsLtd does have some risks, we noticed 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

While Song Shang ElectronicsLtd 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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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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