What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at PSK (KOSDAQ:319660), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What is it?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for PSK, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = ₩43b ÷ (₩262b - ₩35b) (Based on the trailing twelve months to September 2020).
Thus, PSK has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 9.8% generated by the Semiconductor industry.
Check out our latest analysis for PSK
In the above chart we have measured PSK's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering PSK here for free.
How Are Returns Trending?
Things have been pretty stable at PSK, with its capital employed and returns on that capital staying somewhat the same for the last . This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So unless we see a substantial change at PSK in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.
Our Take On PSK's ROCE
In summary, PSK isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has gained an impressive 45% over the last year, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
One more thing, we've spotted 3 warning signs facing PSK that you might find interesting.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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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About KOSDAQ:A319660
PSK
Develops, manufactures, and sells semiconductor processing equipment in worldwide.
Solid track record with excellent balance sheet.
