Atec (KOSDAQ:045660) Could Be Struggling To Allocate Capital

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. In light of that, from a first glance at Atec (KOSDAQ:045660), we've spotted some signs that it could be struggling, so let's investigate.

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 Atec is:

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

0.0095 = ₩915m ÷ (₩104b - ₩8.2b) (Based on the trailing twelve months to December 2023).

Thus, Atec has an ROCE of 1.0%. In absolute terms, that's a low return and it also under-performs the Tech industry average of 6.2%.

See our latest analysis for Atec

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

What Can We Tell From Atec's ROCE Trend?

There is reason to be cautious about Atec, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 2.9% that they were earning one year ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Atec becoming one if things continue as they have.

The Bottom Line On Atec's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 112%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you'd like to know more about Atec, we've spotted 4 warning signs, and 2 of them don't sit too well with us.

While Atec isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.