If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. And from a first read, things don't look too good at i-Components (KOSDAQ:059100), so let's see why.
What is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for i-Components:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.032 = ₩1.1b ÷ (₩50b - ₩16b) (Based on the trailing twelve months to September 2020).
Thus, i-Components has an ROCE of 3.2%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.6%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for i-Components' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of i-Components, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
We are a bit worried about the trend of returns on capital at i-Components. About five years ago, returns on capital were 15%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on i-Components becoming one if things continue as they have.
The Key Takeaway
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors haven't taken kindly to these developments, since the stock has declined 56% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
One final note, you should learn about the 3 warning signs we've spotted with i-Components (including 1 which can't be ignored) .
While i-Components 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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