What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. So on that note, Tesna (KOSDAQ:131970) looks quite promising in regards to its trends of return on capital.
What is 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 Tesna:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.094 = ₩28b ÷ (₩401b - ₩107b) (Based on the trailing twelve months to September 2020).
Therefore, Tesna has an ROCE of 9.4%. In absolute terms, that's a low return but it's around the Semiconductor industry average of 9.8%.
See our latest analysis for Tesna
Historical performance is a great place to start when researching a stock so above you can see the gauge for Tesna's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Tesna, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
Tesna has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 9.4% on its capital. Not only that, but the company is utilizing 329% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
Our Take On Tesna's ROCE
In summary, it's great to see that Tesna has managed to break into profitability and is continuing to reinvest in its business. And a remarkable 1,083% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
Tesna does have some risks, we noticed 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.
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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About KOSDAQ:A131970
Fair value with limited growth.
