Returns On Capital Signal Tricky Times Ahead For Telechips (KOSDAQ:054450)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Telechips (KOSDAQ:054450), 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. The formula for this calculation on Telechips is:

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

0.02 = ₩5.7b ÷ (₩375b - ₩93b) (Based on the trailing twelve months to September 2024).

So, Telechips has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 6.5%.

See our latest analysis for Telechips

In the above chart we have measured Telechips' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Telechips .

How Are Returns Trending?

In terms of Telechips' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 7.0% over the last five years. However it looks like Telechips might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Telechips' reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 16% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Telechips does have some risks though, and we've spotted 1 warning sign for Telechips that you might be interested in.

While Telechips 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.