The Trends At SP SystemsLtd (KOSDAQ:317830) That You Should Know About

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating SP SystemsLtd (KOSDAQ:317830), we don't think it's current trends fit the mold of a multi-bagger.

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

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. To calculate this metric for SP SystemsLtd, this is the formula:

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

0.0013 = ₩53m ÷ (₩54b - ₩14b) (Based on the trailing twelve months to June 2020).

So, SP SystemsLtd has an ROCE of 0.1%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.7%.

See our latest analysis for SP SystemsLtd

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

What The Trend Of ROCE Can Tell Us

Things have been pretty stable at SP SystemsLtd, with its capital employed and returns on that capital staying somewhat the same for the last . It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if SP SystemsLtd doesn't end up being a multi-bagger in a few years time.

In Conclusion...

In summary, SP SystemsLtd isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And with the stock having returned a mere 1.9% in the last year to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

If you'd like to know about the risks facing SP SystemsLtd, we've discovered 2 warning signs that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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