The Trends At SFA Semicon (KOSDAQ:036540) That You Should Know About

There are a few key trends to look for if we want to identify the next multi-bagger. 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. However, after investigating SFA Semicon (KOSDAQ:036540), 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. Analysts use this formula to calculate it for SFA Semicon:

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

0.073 = ₩38b ÷ (₩590b - ₩75b) (Based on the trailing twelve months to September 2020).

Thus, SFA Semicon has an ROCE of 7.3%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 9.8%.

View our latest analysis for SFA Semicon

Above you can see how the current ROCE for SFA Semicon compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering SFA Semicon here for free.

What Can We Tell From SFA Semicon's ROCE Trend?

Things have been pretty stable at SFA Semicon, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at SFA Semicon in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

On a side note, SFA Semicon has done well to reduce current liabilities to 13% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

The Bottom Line

In a nutshell, SFA Semicon has been trudging along with the same returns from the same amount of capital over the last five years. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 176% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing, we've spotted 3 warning signs facing SFA Semicon that you might find interesting.

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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