Quality Reliability Technology (KOSDAQ:405100) May Have Issues Allocating Its Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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 Quality Reliability Technology (KOSDAQ:405100), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Quality Reliability Technology:

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

0.0095 = ₩1.0b ÷ (₩135b - ₩26b) (Based on the trailing twelve months to September 2024).

So, Quality Reliability Technology has an ROCE of 0.9%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 5.7%.

View our latest analysis for Quality Reliability Technology

Above you can see how the current ROCE for Quality Reliability Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Quality Reliability Technology .

How Are Returns Trending?

In terms of Quality Reliability Technology's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 0.9% from 21% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Quality Reliability Technology's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 24% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Quality Reliability Technology has the makings of a multi-bagger.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Quality Reliability Technology (of which 2 are a bit unpleasant!) that you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.