There Are Reasons To Feel Uneasy About Protec's (KOSDAQ:053610) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. In light of that, when we looked at Protec (KOSDAQ:053610) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Protec, this is the formula:

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

0.074 = ₩15b ÷ (₩227b - ₩19b) (Based on the trailing twelve months to December 2020).

Thus, Protec has an ROCE of 7.4%. In absolute terms, that's a low return but it's around the Semiconductor industry average of 8.8%.

See our latest analysis for Protec

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

So How Is Protec's ROCE Trending?

When we looked at the ROCE trend at Protec, we didn't gain much confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 7.4%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

What We Can Learn From Protec's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Protec have fallen, meanwhile the business is employing more capital than it was five years ago. Yet despite these poor fundamentals, the stock has gained a huge 298% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Protec does have some risks though, and we've spotted 3 warning signs for Protec that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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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