ITEK (KOSDAQ:119830) Is Reinvesting At Lower Rates Of Return

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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 ITEK (KOSDAQ:119830), it didn't seem to tick all of these boxes.

Understanding 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. To calculate this metric for ITEK, this is the formula:

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

0.03 = ₩2.8b ÷ (₩146b - ₩54b) (Based on the trailing twelve months to December 2020).

Thus, ITEK has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 8.7%.

See our latest analysis for ITEK

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

What Does the ROCE Trend For ITEK Tell Us?

The trend of ROCE doesn't look fantastic because it's fallen from 5.9% three years ago, while the business's capital employed increased by 122%. That being said, ITEK raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence ITEK might not have received a full period of earnings contribution from it.

On a side note, ITEK's current liabilities have increased over the last three years to 37% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 3.0%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Key Takeaway

In summary, ITEK is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly then, the total return to shareholders over the last five years has been flat. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for ITEK (of which 1 is a bit concerning!) that you should know about.

While ITEK 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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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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