Is UniTest Incorporation (KOSDAQ:086390) Likely To Turn Things Around?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at UniTest Incorporation (KOSDAQ:086390) 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?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on UniTest Incorporation is:

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

0.068 = ₩12b ÷ (₩189b - ₩18b) (Based on the trailing twelve months to June 2020).

So, UniTest Incorporation has an ROCE of 6.8%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 9.0%.

Check out our latest analysis for UniTest Incorporation

Above you can see how the current ROCE for UniTest Incorporation compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for UniTest Incorporation.

What Does the ROCE Trend For UniTest Incorporation Tell Us?

On the surface, the trend of ROCE at UniTest Incorporation doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.8% from 47% five years ago. 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.

On a side note, UniTest Incorporation has done well to pay down its current liabilities to 9.5% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On UniTest Incorporation's ROCE

We're a bit apprehensive about UniTest Incorporation because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Since the stock has skyrocketed 255% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a final note, we've found 2 warning signs for UniTest Incorporation that we think you should be aware of.

While UniTest Incorporation isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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