There Are Reasons To Feel Uneasy About Q.S.I's (KOSDAQ:066310) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Q.S.I (KOSDAQ:066310), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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 Q.S.I:

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

0.0068 = ₩431m ÷ (₩74b - ₩11b) (Based on the trailing twelve months to December 2020).

Therefore, Q.S.I has an ROCE of 0.7%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 8.7%.

See our latest analysis for Q.S.I

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Q.S.I's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Q.S.I's ROCE Trending?

Unfortunately, the trend isn't great with ROCE falling from 2.7% five years ago, while capital employed has grown 20%. Usually this isn't ideal, but given Q.S.I conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Q.S.I might not have received a full period of earnings contribution from it. It's also worth noting the company's latest EBIT figure is within 10% of the previous year, so it's fair to assign the ROCE drop largely to the capital raise.

The Bottom Line On Q.S.I's ROCE

Bringing it all together, while we're somewhat encouraged by Q.S.I's reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 123% 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.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Q.S.I (of which 1 shouldn't be ignored!) that you should know about.

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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