Investors Could Be Concerned With King Slide Works' (TPE:2059) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at King Slide Works (TPE:2059), it didn't seem to tick all of these boxes.

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 King Slide Works, this is the formula:

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

0.16 = NT$2.0b ÷ (NT$13b - NT$1.3b) (Based on the trailing twelve months to December 2020).

Therefore, King Slide Works has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 11% generated by the Tech industry.

Check out our latest analysis for King Slide Works

Above you can see how the current ROCE for King Slide Works 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 report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

In terms of King Slide Works' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 16% from 25% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On King Slide Works' ROCE

Bringing it all together, while we're somewhat encouraged by King Slide Works' reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 5.6% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

King Slide Works does have some risks though, and we've spotted 1 warning sign for King Slide Works that you might be interested in.

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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