There Are Reasons To Feel Uneasy About DOOSAN TESNA's (KOSDAQ:131970) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at DOOSAN TESNA (KOSDAQ:131970), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for DOOSAN TESNA:

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

0.097 = ₩61b ÷ (₩763b - ₩139b) (Based on the trailing twelve months to December 2023).

So, DOOSAN TESNA has an ROCE of 9.7%. On its own that's a low return, but compared to the average of 6.3% generated by the Semiconductor industry, it's much better.

Check out our latest analysis for DOOSAN TESNA

In the above chart we have measured DOOSAN TESNA's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for DOOSAN TESNA .

The Trend Of ROCE

In terms of DOOSAN TESNA's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 9.7% from 20% 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From DOOSAN TESNA's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for DOOSAN TESNA. In light of this, the stock has only gained 16% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

DOOSAN TESNA does have some risks though, and we've spotted 2 warning signs for DOOSAN TESNA that you might be interested in.

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.