YEST (KOSDAQ:122640) Is Reinvesting At Lower Rates Of Return

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating YEST (KOSDAQ:122640), we don't think it's current trends fit the mold of a multi-bagger.

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 YEST is:

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

0.0056 = ₩532m ÷ (₩166b - ₩70b) (Based on the trailing twelve months to December 2020).

Therefore, YEST has an ROCE of 0.6%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 8.8%.

View our latest analysis for YEST

Historical performance is a great place to start when researching a stock so above you can see the gauge for YEST's ROCE against it's prior returns. If you'd like to look at how YEST has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of YEST's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 0.6% from 16% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 42%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 0.6%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

The Bottom Line On YEST's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that YEST is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 111% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

YEST does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those can't be ignored...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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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