Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at SimmTech (KOSDAQ:222800) so let's look a bit deeper.
Return On Capital Employed (ROCE): What is it?
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. To calculate this metric for SimmTech, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = ₩85b ÷ (₩824b - ₩395b) (Based on the trailing twelve months to September 2020).
Therefore, SimmTech has an ROCE of 20%. On its own, that's a standard return, however it's much better than the 9.5% generated by the Semiconductor industry.
See our latest analysis for SimmTech
Above you can see how the current ROCE for SimmTech compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for SimmTech.
What Does the ROCE Trend For SimmTech Tell Us?
SimmTech is displaying some positive trends. The numbers show that in the last four years, the returns generated on capital employed have grown considerably to 20%. Basically the business is earning more per dollar of capital invested and in addition to that, 54% more capital is being employed now too. So we're very much inspired by what we're seeing at SimmTech thanks to its ability to profitably reinvest capital.
On a separate but related note, it's important to know that SimmTech has a current liabilities to total assets ratio of 48%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.The Bottom Line On SimmTech's ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what SimmTech has. And a remarkable 260% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.
SimmTech does have some risks though, and we've spotted 3 warning signs for SimmTech that you might be interested in.
While SimmTech 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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About KOSDAQ:A222800
SIMMTECH
Engages in the developing and manufacturing of high-layer printed circuit boards (PCBs) for semiconductors worldwide.
Undervalued with reasonable growth potential.
