The Returns At Digital Imaging Technology (KOSDAQ:110990) Provide Us With Signs Of What's To Come

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Digital Imaging Technology (KOSDAQ:110990) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Digital Imaging Technology is:

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

0.00088 = ₩148m ÷ (₩330b - ₩163b) (Based on the trailing twelve months to September 2020).

Thus, Digital Imaging Technology has an ROCE of 0.09%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 9.8%.

See our latest analysis for Digital Imaging Technology

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

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Digital Imaging Technology doesn't inspire confidence. To be more specific, ROCE has fallen from 8.9% over the last three years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 50%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

In Conclusion...

We're a bit apprehensive about Digital Imaging Technology because despite more capital being deployed in the business, returns on that capital and sales have both fallen. In spite of that, the stock has delivered a 2.6% return to shareholders who held over the last year. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One more thing: We've identified 4 warning signs with Digital Imaging Technology (at least 1 which shouldn't be ignored) , and understanding them would certainly be useful.

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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