Will The ROCE Trend At Neo Technical System (KOSDAQ:085910) Continue?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Neo Technical System's (KOSDAQ:085910) returns on capital, so let's have a look.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Neo Technical System is:

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

0.073 = ₩3.9b ÷ (₩99b - ₩45b) (Based on the trailing twelve months to September 2020).

Therefore, Neo Technical System has an ROCE of 7.3%. On its own that's a low return, but compared to the average of 5.4% generated by the Machinery industry, it's much better.

View our latest analysis for Neo Technical System

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

What Does the ROCE Trend For Neo Technical System Tell Us?

Neo Technical System's ROCE growth is quite impressive. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 146% over the last five years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 45% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line On Neo Technical System's ROCE

In summary, we're delighted to see that Neo Technical System has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has only returned 22% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

If you'd like to know more about Neo Technical System, we've spotted 5 warning signs, and 1 of them is potentially serious.

While Neo Technical System isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

If you decide to trade Neo Technical System, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.