Does Sincere Navigation's (TPE:2605) Returns On Capital Reflect Well On The Business?

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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. In light of that, from a first glance at Sincere Navigation (TPE:2605), we've spotted some signs that it could be struggling, so let's investigate.

Understanding 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. The formula for this calculation on Sincere Navigation is:

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

0.049 = NT$972m ÷ (NT$22b - NT$2.1b) (Based on the trailing twelve months to September 2020).

So, Sincere Navigation has an ROCE of 4.9%. On its own that's a low return, but compared to the average of 3.5% generated by the Shipping industry, it's much better.

View our latest analysis for Sincere Navigation

In the above chart we have measured Sincere Navigation's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Sincere Navigation's ROCE Trend?

The trend of returns that Sincere Navigation is generating are raising some concerns. Unfortunately, returns have declined substantially over the last five years to the 4.9% we see today. In addition to that, Sincere Navigation is now employing 22% less capital than it was five years ago. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. If these underlying trends continue, we wouldn't be too optimistic going forward.

In Conclusion...

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. In spite of that, the stock has delivered a 3.8% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Sincere Navigation (of which 1 is potentially serious!) that 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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