Here's What's Concerning About SAMT's (KOSDAQ:031330) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. 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 investigating SAMT (KOSDAQ:031330), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. The formula for this calculation on SAMT is:

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

0.13 = ₩34b ÷ (₩346b - ₩88b) (Based on the trailing twelve months to December 2020).

Thus, SAMT has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 5.9% generated by the Electronic industry.

See our latest analysis for SAMT

Historical performance is a great place to start when researching a stock so above you can see the gauge for SAMT's ROCE against it's prior returns. If you're interested in investigating SAMT's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is SAMT's ROCE Trending?

When we looked at the ROCE trend at SAMT, we didn't gain much confidence. Around five years ago the returns on capital were 34%, but since then they've fallen to 13%. However it looks like SAMT might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

On a side note, SAMT has done well to pay down its current liabilities to 25% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On SAMT's ROCE

Bringing it all together, while we're somewhat encouraged by SAMT's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 93% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a final note, we've found 1 warning sign for SAMT that we think you should be aware of.

While SAMT 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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