INNOX Advanced MaterialsLtd's (KOSDAQ:272290) Returns On Capital Not Reflecting Well On The Business

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. In light of that, when we looked at INNOX Advanced MaterialsLtd (KOSDAQ:272290) and its ROCE trend, we weren't exactly thrilled.

What Is 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 INNOX Advanced MaterialsLtd is:

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

0.11 = ₩61b ÷ (₩778b - ₩197b) (Based on the trailing twelve months to June 2024).

Therefore, INNOX Advanced MaterialsLtd has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Semiconductor industry average of 5.4% it's much better.

View our latest analysis for INNOX Advanced MaterialsLtd

Above you can see how the current ROCE for INNOX Advanced MaterialsLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering INNOX Advanced MaterialsLtd for free.

What Can We Tell From INNOX Advanced MaterialsLtd's ROCE Trend?

On the surface, the trend of ROCE at INNOX Advanced MaterialsLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 11% from 22% five years ago. However it looks like INNOX Advanced MaterialsLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, INNOX Advanced MaterialsLtd has decreased its current liabilities to 25% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

To conclude, we've found that INNOX Advanced MaterialsLtd is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 11% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

If you'd like to know about the risks facing INNOX Advanced MaterialsLtd, we've discovered 1 warning sign that you should be aware of.

While INNOX Advanced MaterialsLtd 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.