The Returns On Capital At SUNIC SYSTEM (KOSDAQ:171090) Don't Inspire Confidence

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within SUNIC SYSTEM (KOSDAQ:171090), we weren't too hopeful.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its 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).

Thus, SUNIC SYSTEM has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Semiconductor industry average of 9.5%.

See our latest analysis for SUNIC SYSTEM

Historical performance is a great place to start when researching a stock so above you can see the gauge for SUNIC SYSTEM's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of SUNIC SYSTEM, check out these free graphs here.

So How Is SUNIC SYSTEM's ROCE Trending?

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. If these trends continue, we wouldn't expect SUNIC SYSTEM to turn into a multi-bagger.

The Key Takeaway

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Long term shareholders who've owned the stock over the last three years have experienced a 61% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know more about SUNIC SYSTEM, we've spotted 4 warning signs, and 1 of them can't be ignored.

While SUNIC SYSTEM 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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