Should We Be Excited About The Trends Of Returns At 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Sang-A FrontecLtd (KOSDAQ:089980) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Sang-A FrontecLtd is:

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

0.033 = ₩6.2b ÷ (₩287b - ₩99b) (Based on the trailing twelve months to September 2020).

Therefore, Sang-A FrontecLtd has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 6.6%.

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 here for free.

So How Is Sang-A FrontecLtd's ROCE Trending?

Unfortunately, the trend isn't great with ROCE falling from 7.3% five years ago, while capital employed has grown 79%. 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. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Sang-A FrontecLtd might not have received a full period of earnings contribution from it.

The Bottom Line

We're a bit apprehensive about Sang-A FrontecLtd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 255%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Sang-A FrontecLtd does have some risks, we noticed 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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. 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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