Understanding Return On Capital Employed (ROCE)
Return On Capital Employed (ROCE) is a metric used to assess a company's efficiency at generating profits from its capital. Simply put, it shows how well a business is using its money to make more money. For ShunSin Technology Holdings (TWSE:6451), the formula is:
ROCE = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
For ShunSin, with NT$204 million EBIT and assets of NT$16 billion minus current liabilities of NT$7.5 billion, the ROCE is 2.5%. This is notably low compared to the Semiconductor industry's average of 8.8%.
Why ROCE Matters
ROCE is important because it helps investors understand how well a company is using its capital to generate earnings. A declining ROCE can indicate issues like reduced profitability or increased expenses. In ShunSin's case, the shrinking ROCE suggests challenges in maintaining profitability.
Historical Trends and Implications
Five years ago, ShunSin had a ROCE of 6.0%, but this has since dwindled to 2.5%. This decline, coupled with stable capital employed, hints at a mature business facing competition or reduced profit margins. If such trends persist, it's unlikely that ShunSin will see substantial growth or become a "multi-bagger"—a term for stocks that significantly increase in value.
Current Liabilities and Risks
ShunSin's current liabilities account for 48% of total assets, affecting the ROCE calculation. This reliance on suppliers or short-term loans poses risks, as it may indicate that a large part of the business is funded by debt, which could strain financial stability.
Final Thoughts
Despite an 82% stock return over five years, caution is advised. The declining ROCE and high liabilities suggest potential financial instability. Investors should be wary and consider these factors before making decisions.
