Is PJ Electronics (KOSDAQ:006140) Likely To Turn Things Around?

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Although, when we looked at PJ Electronics (KOSDAQ:006140), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on PJ Electronics is:

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

0.044 = ₩5.2b ÷ (₩143b - ₩24b) (Based on the trailing twelve months to September 2020).

Thus, PJ Electronics has an ROCE of 4.4%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.6%.

See our latest analysis for PJ Electronics

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'd like to look at how PJ Electronics has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is PJ Electronics' ROCE Trending?

On the surface, the trend of ROCE at PJ Electronics doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.4% from 7.4% 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On PJ Electronics' ROCE

Bringing it all together, while we're somewhat encouraged by PJ Electronics' reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 76% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you want to know some of the risks facing PJ Electronics we've found 3 warning signs (1 is concerning!) that you should be aware of before investing here.

While PJ Electronics 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. 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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