Will Korea Fuel-Tech (KOSDAQ:123410) Multiply In Value Going Forward?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Korea Fuel-Tech (KOSDAQ:123410) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Korea Fuel-Tech:

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

0.023 = ₩4.1b ÷ (₩327b - ₩150b) (Based on the trailing twelve months to June 2020).

Therefore, Korea Fuel-Tech has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 4.7%.

See our latest analysis for Korea Fuel-Tech

Historical performance is a great place to start when researching a stock so above you can see the gauge for Korea Fuel-Tech's ROCE against it's prior returns. If you're interested in investigating Korea Fuel-Tech's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Korea Fuel-Tech's ROCE Trend?

In terms of Korea Fuel-Tech's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 12%, but since then they've fallen to 2.3%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Korea Fuel-Tech's current liabilities are still rather high at 46% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Korea Fuel-Tech's ROCE

Bringing it all together, while we're somewhat encouraged by Korea Fuel-Tech's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 20% over the last five years, investors may not be too optimistic on this trend improving either. 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 more thing: We've identified 4 warning signs with Korea Fuel-Tech (at least 2 which don't sit too well with us) , and understanding these would certainly be useful.

While Korea Fuel-Tech 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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