There Are Reasons To Feel Uneasy About C&G Hi Tech's (KOSDAQ:264660) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Although, when we looked at C&G Hi Tech (KOSDAQ:264660), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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 C&G Hi Tech is:

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

0.036 = ₩4.5b ÷ (₩184b - ₩59b) (Based on the trailing twelve months to September 2024).

Thus, C&G Hi Tech has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 6.4%.

Check out our latest analysis for C&G Hi Tech

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 C&G Hi Tech has performed in the past in other metrics, you can view this free graph of C&G Hi Tech's past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of C&G Hi Tech's historical ROCE movements, the trend isn't fantastic. Around two years ago the returns on capital were 17%, but since then they've fallen to 3.6%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line On C&G Hi Tech's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for C&G Hi Tech have fallen, meanwhile the business is employing more capital than it was two years ago. Since the stock has skyrocketed 164% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

C&G Hi Tech does come with some risks though, we found 5 warning signs in our investment analysis, and 1 of those can't be ignored...

While C&G Hi Tech isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.