Returns On Capital At INFAC (KRX:023810) Paint An Interesting Picture

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at INFAC (KRX:023810) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for INFAC, this is the formula:

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

0.049 = ₩7.2b ÷ (₩311b - ₩163b) (Based on the trailing twelve months to September 2020).

Thus, INFAC has an ROCE of 4.9%. On its own, that's a low figure but it's around the 4.1% average generated by the Auto Components industry.

View our latest analysis for INFAC

Historical performance is a great place to start when researching a stock so above you can see the gauge for INFAC's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of INFAC, check out these free graphs here.

So How Is INFAC's ROCE Trending?

In terms of INFAC's historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 4.9% and the business has deployed 21% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 52% of total assets, this reported ROCE would probably be less than4.9% because total capital employed would be higher.The 4.9% ROCE could be even lower if current liabilities weren't 52% of total assets, because the the formula would show a larger base of total capital employed. So with current liabilities at such high levels, this effectively means the likes of suppliers or short-term creditors are funding a meaningful part of the business, which in some instances can bring some risks.

The Bottom Line

Long story short, while INFAC has been reinvesting its capital, the returns that it's generating haven't increased. And investors may be recognizing these trends since the stock has only returned a total of 36% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for INFAC (of which 2 are a bit concerning!) that you should know about.

While INFAC 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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