We're Watching These Trends At Ajinextek (KOSDAQ:059120)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Ajinextek (KOSDAQ:059120) 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 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. To calculate this metric for Ajinextek, this is the formula:

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

0.064 = ₩2.9b ÷ (₩49b - ₩3.8b) (Based on the trailing twelve months to September 2020).

Therefore, Ajinextek has an ROCE of 6.4%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 9.8%.

View our latest analysis for Ajinextek

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

The Trend Of ROCE

When we looked at the ROCE trend at Ajinextek, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 6.4% from 10% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Ajinextek's ROCE

Bringing it all together, while we're somewhat encouraged by Ajinextek's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 73% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a final note, we've found 1 warning sign for Ajinextek that we think you should be aware of.

While Ajinextek 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. 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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