We're Watching These Trends At NEOOTO (KOSDAQ:212560)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. In light of that, when we looked at NEOOTO (KOSDAQ:212560) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for NEOOTO, this is the formula:

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

0.017 = ₩1.7b ÷ (₩146b - ₩48b) (Based on the trailing twelve months to September 2020).

Therefore, NEOOTO has an ROCE of 1.7%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 4.1%.

Check out our latest analysis for NEOOTO

Historical performance is a great place to start when researching a stock so above you can see the gauge for NEOOTO's ROCE against it's prior returns. If you'd like to look at how NEOOTO has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is NEOOTO's ROCE Trending?

In terms of NEOOTO's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 9.7%, but since then they've fallen to 1.7%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

The Bottom Line On NEOOTO's ROCE

To conclude, we've found that NEOOTO is reinvesting in the business, but returns have been falling. Since the stock has declined 18% 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.

If you want to know some of the risks facing NEOOTO we've found 4 warning signs (1 is concerning!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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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