Should You Be Worried About Siward Crystal Technology's (TPE:2484) Returns On Capital?

When researching a stock for investment, what can tell us that the company is in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. And from a first read, things don't look too good at Siward Crystal Technology (TPE:2484), so let's see why.

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. Analysts use this formula to calculate it for Siward Crystal Technology:

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

0.05 = NT$184m ÷ (NT$4.3b - NT$673m) (Based on the trailing twelve months to September 2020).

Thus, Siward Crystal Technology has an ROCE of 5.0%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 11%.

See our latest analysis for Siward Crystal Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Siward Crystal Technology's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Siward Crystal Technology, check out these free graphs here.

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Siward Crystal Technology. Unfortunately the returns on capital have diminished from the 6.9% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Siward Crystal Technology to turn into a multi-bagger.

The Key Takeaway

In summary, it's unfortunate that Siward Crystal Technology is generating lower returns from the same amount of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 68% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Siward Crystal Technology (including 1 which doesn't sit too well with us) .

While Siward Crystal Technology may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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