ENF Technology (KOSDAQ:102710) 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? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating ENF Technology (KOSDAQ:102710), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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 ENF Technology, this is the formula:

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

0.11 = ₩49b ÷ (₩698b - ₩252b) (Based on the trailing twelve months to September 2024).

Thus, ENF Technology has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 7.4% generated by the Chemicals industry.

Check out our latest analysis for ENF Technology

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

What Can We Tell From ENF Technology's ROCE Trend?

On the surface, the trend of ROCE at ENF Technology doesn't inspire confidence. Over the last five years, returns on capital have decreased to 11% from 20% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, ENF Technology's current liabilities have increased over the last five years to 36% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 11%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Bottom Line

In summary, ENF Technology is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 32% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you want to know some of the risks facing ENF Technology we've found 3 warning signs (1 can't be ignored!) that you should be aware of before investing here.

While ENF Technology 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.