Here's What To Make Of Gaonchips' (KOSDAQ:399720) Decelerating Rates Of Return

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. However, after investigating Gaonchips (KOSDAQ:399720), we don't think it's current trends fit the mold of a multi-bagger.

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 Gaonchips is:

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

0.062 = ₩4.4b ÷ (₩95b - ₩25b) (Based on the trailing twelve months to December 2023).

So, Gaonchips has an ROCE of 6.2%. In absolute terms, that's a low return but it's around the Semiconductor industry average of 5.4%.

View our latest analysis for Gaonchips

In the above chart we have measured Gaonchips' 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 Gaonchips for free.

What Does the ROCE Trend For Gaonchips Tell Us?

Over the past one year, Gaonchips' ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Gaonchips doesn't end up being a multi-bagger in a few years time.

In Conclusion...

We can conclude that in regards to Gaonchips' returns on capital employed and the trends, there isn't much change to report on. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 217% gain to shareholders who have held over the last year. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Gaonchips does have some risks though, and we've spotted 2 warning signs for Gaonchips that you might be interested in.

While Gaonchips 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.