Hytc (KOSDAQ:148930) Is Reinvesting At Lower Rates Of Return

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Having said that, from a first glance at Hytc (KOSDAQ:148930) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Hytc, this is the formula:

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

0.018 = ₩1.2b ÷ (₩71b - ₩4.2b) (Based on the trailing twelve months to September 2024).

Thus, Hytc has an ROCE of 1.8%. Ultimately, that's a low return and it under-performs the Machinery industry average of 6.7%.

Check out our latest analysis for Hytc

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 Hytc has performed in the past in other metrics, you can view this free graph of Hytc's past earnings, revenue and cash flow.

What Does the ROCE Trend For Hytc Tell Us?

In terms of Hytc's historical ROCE movements, the trend isn't fantastic. Over the last four years, returns on capital have decreased to 1.8% from 23% four years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Hytc has done well to pay down its current liabilities to 5.9% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Hytc's ROCE

In summary, we're somewhat concerned by Hytc's diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 43% from where it was year ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we found 3 warning signs for Hytc (1 shouldn't be ignored) you should be aware of.

While Hytc 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.