Returns On Capital Signal Tricky Times Ahead For Sang-A FrontecLtd (KOSDAQ:089980)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Sang-A FrontecLtd (KOSDAQ:089980) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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 Sang-A FrontecLtd, this is the formula:

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

0.039 = ₩7.4b ÷ (₩283b - ₩94b) (Based on the trailing twelve months to December 2020).

Therefore, Sang-A FrontecLtd has an ROCE of 3.9%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.9%.

See our latest analysis for Sang-A FrontecLtd

Above you can see how the current ROCE for Sang-A FrontecLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Sang-A FrontecLtd.

What Can We Tell From Sang-A FrontecLtd's ROCE Trend?

Unfortunately, the trend isn't great with ROCE falling from 8.9% five years ago, while capital employed has grown 67%. Usually this isn't ideal, but given Sang-A FrontecLtd conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Sang-A FrontecLtd's earnings and if they change as a result from the capital raise.

What We Can Learn From Sang-A FrontecLtd's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Sang-A FrontecLtd have fallen, meanwhile the business is employing more capital than it was five years ago. Yet despite these poor fundamentals, the stock has gained a huge 340% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Sang-A FrontecLtd (including 1 which doesn't sit too well with us) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.
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