We Like These Underlying Trends At MNtech (KOSDAQ:095500)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at MNtech (KOSDAQ:095500) so let's look a bit deeper.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for MNtech:

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

0.024 = ₩4.7b ÷ (₩340b - ₩142b) (Based on the trailing twelve months to September 2020).

Therefore, MNtech has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 8.0%.

Check out our latest analysis for MNtech

Historical performance is a great place to start when researching a stock so above you can see the gauge for MNtech's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of MNtech, check out these free graphs here.

So How Is MNtech's ROCE Trending?

The fact that MNtech is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 2.4% on its capital. And unsurprisingly, like most companies trying to break into the black, MNtech is utilizing 28% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

Another thing to note, MNtech has a high ratio of current liabilities to total assets of 42%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

Long story short, we're delighted to see that MNtech's reinvestment activities have paid off and the company is now profitable. Astute investors may have an opportunity here because the stock has declined 43% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for MNtech (of which 1 can't be ignored!) that you should know about.

While MNtech 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. 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.
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