There's Been No Shortage Of Growth Recently For SFA Semicon's (KOSDAQ:036540) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in SFA Semicon's (KOSDAQ:036540) returns on capital, so let's have a look.

What is 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. Analysts use this formula to calculate it for SFA Semicon:

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

0.065 = ₩34b ÷ (₩587b - ₩65b) (Based on the trailing twelve months to December 2020).

Therefore, SFA Semicon has an ROCE of 6.5%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 8.8%.

View our latest analysis for SFA Semicon

In the above chart we have measured SFA Semicon's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

Shareholders will be relieved that SFA Semicon has broken into profitability. The company now earns 6.5% on its capital, because five years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.

One more thing to note, SFA Semicon has decreased current liabilities to 11% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Key Takeaway

In summary, we're delighted to see that SFA Semicon has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And a remarkable 209% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if SFA Semicon can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 1 warning sign with SFA Semicon and understanding this should be part of your investment process.

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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