Stock Analysis

Is First Steamship (TPE:2601) Headed For Trouble?

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TWSE:2601
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When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within First Steamship (TPE:2601), we weren't too hopeful.

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. To calculate this metric for First Steamship, this is the formula:

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

0.028 = NT$642m ÷ (NT$34b - NT$11b) (Based on the trailing twelve months to September 2020).

So, First Steamship has an ROCE of 2.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 3.3%.

See our latest analysis for First Steamship

roce
TSEC:2601 Return on Capital Employed November 23rd 2020

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 First Steamship, check out these free graphs here.

What Does the ROCE Trend For First Steamship Tell Us?

We are a bit worried about the trend of returns on capital at First Steamship. Unfortunately the returns on capital have diminished from the 6.1% 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. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect First Steamship to turn into a multi-bagger.

The Bottom Line On First Steamship's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors must expect better things on the horizon though because the stock has risen 21% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

While First Steamship doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

While First Steamship 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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About TWSE:2601

First Steamship

First Steamship Co., Ltd. operates as a shipping company in Taiwan, China, and internationally.

Slightly overvalued with imperfect balance sheet.

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