We're Watching These Trends At Taiwan Chinsan Electronic Industrial (GTSM:8042)

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Taiwan Chinsan Electronic Industrial (GTSM:8042), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Taiwan Chinsan Electronic Industrial is:

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

0.037 = NT$185m ÷ (NT$7.7b - NT$2.7b) (Based on the trailing twelve months to September 2020).

Therefore, Taiwan Chinsan Electronic Industrial has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Electronic industry average of 11%.

Check out our latest analysis for Taiwan Chinsan Electronic Industrial

Historical performance is a great place to start when researching a stock so above you can see the gauge for Taiwan Chinsan Electronic Industrial's ROCE against it's prior returns. If you're interested in investigating Taiwan Chinsan Electronic Industrial's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Taiwan Chinsan Electronic Industrial Tell Us?

When we looked at the ROCE trend at Taiwan Chinsan Electronic Industrial, we didn't gain much confidence. Around five years ago the returns on capital were 8.4%, but since then they've fallen to 3.7%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Taiwan Chinsan Electronic Industrial's ROCE

Bringing it all together, while we're somewhat encouraged by Taiwan Chinsan Electronic Industrial's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 41% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Taiwan Chinsan Electronic Industrial does have some risks, we noticed 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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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