JI-Tech (KOSDAQ:417500) May Have Issues Allocating Its Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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 briefly looking over the numbers, we don't think JI-Tech (KOSDAQ:417500) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for JI-Tech:

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

0.061 = ₩5.9b ÷ (₩127b - ₩30b) (Based on the trailing twelve months to June 2024).

Therefore, JI-Tech has an ROCE of 6.1%. On its own, that's a low figure but it's around the 5.4% average generated by the Semiconductor industry.

See our latest analysis for JI-Tech

In the above chart we have measured JI-Tech's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for JI-Tech .

What Can We Tell From JI-Tech's ROCE Trend?

Unfortunately, the trend isn't great with ROCE falling from 24% four years ago, while capital employed has grown 521%. Usually this isn't ideal, but given JI-Tech conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. JI-Tech probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

The Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for JI-Tech have fallen, meanwhile the business is employing more capital than it was four years ago. Investors haven't taken kindly to these developments, since the stock has declined 12% from where it was year ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

JI-Tech does have some risks, we noticed 2 warning signs (and 1 which is concerning) we think you should know about.

While JI-Tech may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.