What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after investigating SNU Precision (KOSDAQ:080000), we don't think it's current trends fit the mold of a multi-bagger.
What is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for SNU Precision:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.076 = ₩9.2b ÷ (₩158b - ₩36b) (Based on the trailing twelve months to June 2020).
Therefore, SNU Precision has an ROCE of 7.6%. On its own, that's a low figure but it's around the 8.7% average generated by the Semiconductor industry.
In the above chart we have measured SNU Precision's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering SNU Precision here for free.
What Can We Tell From SNU Precision's ROCE Trend?
Over the past two years, SNU Precision's ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if SNU Precision doesn't end up being a multi-bagger in a few years time.
What We Can Learn From SNU Precision's ROCE
In summary, SNU Precision isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And with the stock having returned a mere 14% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
If you want to continue researching SNU Precision, you might be interested to know about the 1 warning sign that our analysis has discovered.
While SNU Precision 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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