NEXTEEL (KRX:092790) Could Be Struggling To Allocate Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at NEXTEEL (KRX:092790) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on NEXTEEL is:

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

0.13 = ₩67b ÷ (₩725b - ₩200b) (Based on the trailing twelve months to June 2024).

Thus, NEXTEEL has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 5.2% generated by the Metals and Mining industry.

See our latest analysis for NEXTEEL

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

What Can We Tell From NEXTEEL's ROCE Trend?

In terms of NEXTEEL's historical ROCE movements, the trend isn't fantastic. Over the last two years, returns on capital have decreased to 13% from 38% two years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, NEXTEEL has done well to pay down its current liabilities to 28% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for NEXTEEL have fallen, meanwhile the business is employing more capital than it was two years ago. But investors must be expecting an improvement of sorts because over the last yearthe stock has delivered a respectable 20% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a final note, we found 5 warning signs for NEXTEEL (2 shouldn't be ignored) you should be aware of.

While NEXTEEL may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.