Capital Allocation Trends At VINA TECHLtd (KOSDAQ:126340) Aren't Ideal

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after investigating VINA TECHLtd (KOSDAQ:126340), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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 VINA TECHLtd is:

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

0.041 = ₩4.0b ÷ (₩153b - ₩57b) (Based on the trailing twelve months to March 2024).

So, VINA TECHLtd has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 6.9%.

Check out our latest analysis for VINA TECHLtd

Above you can see how the current ROCE for VINA TECHLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for VINA TECHLtd .

What Does the ROCE Trend For VINA TECHLtd Tell Us?

On the surface, the trend of ROCE at VINA TECHLtd doesn't inspire confidence. Around four years ago the returns on capital were 18%, but since then they've fallen to 4.1%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

In Conclusion...

We're a bit apprehensive about VINA TECHLtd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Since the stock has skyrocketed 239% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for VINA TECHLtd (of which 1 doesn't sit too well with us!) that you should know about.

While VINA TECHLtd 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.

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