The Returns At Moda-InnoChips (KOSDAQ:080420) Provide Us With Signs Of What's To Come

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 Moda-InnoChips (KOSDAQ:080420), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Moda-InnoChips, this is the formula:

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

0.031 = ₩21b ÷ (₩961b - ₩301b) (Based on the trailing twelve months to September 2020).

Therefore, Moda-InnoChips has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.6%.

See our latest analysis for Moda-InnoChips

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

What Can We Tell From Moda-InnoChips' ROCE Trend?

In terms of Moda-InnoChips' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 14% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 31%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 3.1%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

What We Can Learn From Moda-InnoChips' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Moda-InnoChips. And there could be an opportunity here if other metrics look good too, because the stock has declined 32% in the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you'd like to know more about Moda-InnoChips, we've spotted 5 warning signs, and 2 of them make us uncomfortable.

While Moda-InnoChips 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.

If you decide to trade Moda-InnoChips, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.