Will the Promising Trends At A-Tech Solution (KOSDAQ:071670) Continue?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. So when we looked at A-Tech Solution (KOSDAQ:071670) and its trend of ROCE, we really liked what we saw.

What is Return On Capital Employed (ROCE)?

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 A-Tech Solution:

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

0.043 = ₩3.6b ÷ (₩171b - ₩86b) (Based on the trailing twelve months to September 2020).

So, A-Tech Solution has an ROCE of 4.3%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.4%.

Check out our latest analysis for A-Tech Solution

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 A-Tech Solution has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From A-Tech Solution's ROCE Trend?

Shareholders will be relieved that A-Tech Solution has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 4.3%, which is always encouraging. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.

Another thing to note, A-Tech Solution has a high ratio of current liabilities to total assets of 50%. 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.

The Key Takeaway

To bring it all together, A-Tech Solution has done well to increase the returns it's generating from its capital employed. Since the stock has returned a staggering 290% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing: We've identified 2 warning signs with A-Tech Solution (at least 1 which is concerning) , and understanding them would certainly be useful.

While A-Tech Solution 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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