Capital Allocation Trends At WISE iTech (KOSDAQ:065370) Aren't Ideal

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. In light of that, when we looked at WISE iTech (KOSDAQ:065370) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on WISE iTech is:

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

0.10 = ₩3.7b ÷ (₩42b - ₩5.6b) (Based on the trailing twelve months to December 2020).

Thus, WISE iTech has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Software industry average of 7.7% it's much better.

Check out our latest analysis for WISE iTech

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 want to delve into the historical earnings, revenue and cash flow of WISE iTech, check out these free graphs here.

What Does the ROCE Trend For WISE iTech Tell Us?

Unfortunately, the trend isn't great with ROCE falling from 17% two years ago, while capital employed has grown 255%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It's unlikely that all of the funds raised have been put to work yet, so as a consequence WISE iTech might not have received a full period of earnings contribution from it.

On a related note, WISE iTech has decreased its current liabilities to 14% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

While returns have fallen for WISE iTech in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 465% to shareholders in the last three years. So should these growth trends continue, we'd be optimistic on the stock going forward.

On a final note, we've found 3 warning signs for WISE iTech that we think you should be aware of.

While WISE iTech 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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