Is This A Sign of Things To Come At SUNIC SYSTEM (KOSDAQ:171090)?

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after glancing at the trends within SUNIC SYSTEM (KOSDAQ:171090), we weren't too hopeful.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on SUNIC SYSTEM is:

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

0.11 = ₩10b ÷ (₩112b - ₩22b) (Based on the trailing twelve months to September 2020).

So, SUNIC SYSTEM has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 9.7% generated by the Semiconductor industry.

Check out our latest analysis for SUNIC SYSTEM

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how SUNIC SYSTEM has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about SUNIC SYSTEM, given the returns are trending downwards. To be more specific, the ROCE was 21% three years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last three years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on SUNIC SYSTEM becoming one if things continue as they have.

In Conclusion...

In summary, it's unfortunate that SUNIC SYSTEM is generating lower returns from the same amount of capital. But investors must be expecting an improvement of sorts because over the last three yearsthe stock has delivered a respectable 28% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

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

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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