Is SK-ElectronicsLTD (TYO:6677) Likely To Turn Things Around?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at SK-ElectronicsLTD (TYO:6677) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on SK-ElectronicsLTD is:

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

0.12 = JP¥2.8b ÷ (JP¥29b - JP¥5.1b) (Based on the trailing twelve months to March 2020).

Therefore, SK-ElectronicsLTD has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 8.8% generated by the Semiconductor industry.

View our latest analysis for SK-ElectronicsLTD

Above you can the how the current ROCE for SK-ElectronicsLTD's compares to it's prior returns on capital, but you can only tell so much from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For SK-ElectronicsLTD Tell Us?

When we looked at the ROCE trend at SK-ElectronicsLTD, we didn't gain much confidence. To be more specific, ROCE has fallen from 29% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

In Conclusion...

In summary, we're somewhat concerned by SK-ElectronicsLTD's diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 11% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

SK-ElectronicsLTD does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is significant...

While SK-ElectronicsLTD isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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