Returns On Capital Signal Tricky Times Ahead For NOVATECH (KOSDAQ:285490)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. However, after investigating NOVATECH (KOSDAQ:285490), we don't think it's current trends fit the mold of a multi-bagger.

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 NOVATECH is:

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

0.14 = ₩23b ÷ (₩175b - ₩9.9b) (Based on the trailing twelve months to March 2024).

Thus, NOVATECH has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 8.1% generated by the Electrical industry.

Check out our latest analysis for NOVATECH

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

How Are Returns Trending?

On the surface, the trend of ROCE at NOVATECH doesn't inspire confidence. To be more specific, ROCE has fallen from 19% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

Our Take On NOVATECH's ROCE

To conclude, we've found that NOVATECH is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 76% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a final note, we've found 1 warning sign for NOVATECH that we think you should be aware of.

While NOVATECH 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.