Investors Could Be Concerned With Sang-A FrontecLtd's (KOSDAQ:089980) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 Sang-A FrontecLtd (KOSDAQ:089980), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Sang-A FrontecLtd is:

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

0.032 = ₩8.2b ÷ (₩369b - ₩115b) (Based on the trailing twelve months to March 2024).

Thus, Sang-A FrontecLtd has an ROCE of 3.2%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 6.7%.

Check out our latest analysis for Sang-A FrontecLtd

In the above chart we have measured Sang-A FrontecLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Sang-A FrontecLtd for free.

What Does the ROCE Trend For Sang-A FrontecLtd Tell Us?

We weren't thrilled with the trend because Sang-A FrontecLtd's ROCE has reduced by 75% over the last five years, while the business employed 88% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. Sang-A FrontecLtd probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a side note, Sang-A FrontecLtd has done well to pay down its current liabilities to 31% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Sang-A FrontecLtd's ROCE

To conclude, we've found that Sang-A FrontecLtd is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 47% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

While Sang-A FrontecLtd doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for A089980 on our platform.

While Sang-A FrontecLtd 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. 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.