What We Make Of System and Application Technologies' (KOSDAQ:060540) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, System and Application Technologies (KOSDAQ:060540) looks quite promising in regards to its trends of return on capital.

What is 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. Analysts use this formula to calculate it for System and Application Technologies:

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

0.068 = ₩6.6b ÷ (₩132b - ₩34b) (Based on the trailing twelve months to September 2020).

Therefore, System and Application Technologies has an ROCE of 6.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.1%.

Check out our latest analysis for System and Application Technologies

Historical performance is a great place to start when researching a stock so above you can see the gauge for System and Application Technologies' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of System and Application Technologies, check out these free graphs here.

What Can We Tell From System and Application Technologies' ROCE Trend?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 6.8%. The amount of capital employed has increased too, by 72%. So we're very much inspired by what we're seeing at System and Application Technologies thanks to its ability to profitably reinvest capital.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 26% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

In Conclusion...

To sum it up, System and Application Technologies has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 51% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you'd like to know about the risks facing System and Application Technologies, we've discovered 3 warning signs that you should be aware of.

While System and Application Technologies 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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