There Are Reasons To Feel Uneasy About Charm EngineeringLtd's (KRX:009310) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Charm EngineeringLtd (KRX:009310) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is 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 Charm EngineeringLtd:

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

0.011 = ₩7.1b ÷ (₩751b - ₩95b) (Based on the trailing twelve months to December 2020).

So, Charm EngineeringLtd has an ROCE of 1.1%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 8.8%.

Check out our latest analysis for Charm EngineeringLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Charm EngineeringLtd's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

Unfortunately, the trend isn't great with ROCE falling from 2.6% five years ago, while capital employed has grown 29%. That being said, Charm EngineeringLtd raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Charm EngineeringLtd's earnings and if they change as a result from the capital raise.

What We Can Learn From Charm EngineeringLtd's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Charm EngineeringLtd is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 27% over the last three years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Charm EngineeringLtd (of which 1 is 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. 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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