Here's What's Concerning About TSI's (KOSDAQ:277880) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at TSI (KOSDAQ:277880), it didn't seem to tick all of these boxes.

We've discovered 4 warning signs about TSI. View them for free.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for TSI:

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

0.10 = ₩16b ÷ (₩366b - ₩214b) (Based on the trailing twelve months to December 2024).

So, TSI has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 6.2% it's much better.

View our latest analysis for TSI

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

How Are Returns Trending?

In terms of TSI's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 10% from 19% five years ago. However it looks like TSI might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

On a side note, TSI's current liabilities have increased over the last five years to 58% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by TSI's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 16% so the market doesn't look too hopeful on these trends strengthening any time soon. 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 TSI we've found 4 warning signs (2 are a bit unpleasant!) that you should be aware of before investing here.

While TSI 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.