Here's What We Make Of Uniquest's (KRX:077500) Returns On Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. And from a first read, things don't look too good at Uniquest (KRX:077500), so let's see why.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Uniquest:

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

0.025 = ₩5.6b ÷ (₩357b - ₩130b) (Based on the trailing twelve months to September 2020).

Therefore, Uniquest has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 9.8%.

View our latest analysis for Uniquest

Above you can see how the current ROCE for Uniquest compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Uniquest here for free.

So How Is Uniquest's ROCE Trending?

We are a bit worried about the trend of returns on capital at Uniquest. To be more specific, the ROCE was 4.1% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Uniquest becoming one if things continue as they have.

In Conclusion...

In summary, it's unfortunate that Uniquest is generating lower returns from the same amount of capital. Yet despite these poor fundamentals, the stock has gained a huge 399% over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you want to continue researching Uniquest, you might be interested to know about the 3 warning signs that our analysis has discovered.

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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