Can Ram Technology (KOSDAQ:171010) Continue To Grow Its Returns On Capital?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Ram Technology (KOSDAQ:171010) so let's look a bit deeper.

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 Ram Technology, this is the formula:

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

0.039 = ₩1.9b ÷ (₩70b - ₩20b) (Based on the trailing twelve months to September 2020).

So, Ram Technology has an ROCE of 3.9%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 9.8%.

Check out our latest analysis for Ram Technology

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

How Are Returns Trending?

We're delighted to see that Ram Technology is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 3.9% on its capital. In addition to that, Ram Technology is employing 43% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 28%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Bottom Line On Ram Technology's ROCE

In summary, it's great to see that Ram Technology has managed to break into profitability and is continuing to reinvest in its business. Since the stock has returned a staggering 203% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a final note, we found 3 warning signs for Ram Technology (1 makes us a bit uncomfortable) you should be aware of.

While Ram Technology may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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