The Returns At Korea Fuel-Tech (KOSDAQ:123410) Provide Us With Signs Of What's To Come

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Korea Fuel-Tech (KOSDAQ:123410), it didn't seem to tick all of these boxes.

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 Korea Fuel-Tech is:

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

0.014 = ₩2.7b ÷ (₩360b - ₩166b) (Based on the trailing twelve months to September 2020).

So, Korea Fuel-Tech has an ROCE of 1.4%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 4.1%.

Check out our latest analysis for Korea Fuel-Tech

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'd like to look at how Korea Fuel-Tech has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at Korea Fuel-Tech doesn't inspire confidence. Around five years ago the returns on capital were 10%, but since then they've fallen to 1.4%. However it looks like Korea Fuel-Tech might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Another thing to note, Korea Fuel-Tech has a high ratio of current liabilities to total assets of 46%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

To conclude, we've found that Korea Fuel-Tech is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 16% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One final note, you should learn about the 5 warning signs we've spotted with Korea Fuel-Tech (including 2 which are concerning) .

While Korea Fuel-Tech 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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