Returns On Capital At PEMTRON (KOSDAQ:168360) Have Stalled

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Looking at PEMTRON (KOSDAQ:168360), it does have a high ROCE right now, but lets see how returns are trending.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for PEMTRON, this is the formula:

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

0.20 = ₩8.7b ÷ (₩80b - ₩36b) (Based on the trailing twelve months to September 2023).

So, PEMTRON has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 6.5% earned by companies in a similar industry.

See our latest analysis for PEMTRON

In the above chart we have measured PEMTRON'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 PEMTRON for free.

What The Trend Of ROCE Can Tell Us

Things have been pretty stable at PEMTRON, with its capital employed and returns on that capital staying somewhat the same for the last . Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So while the current operations are delivering respectable returns, unless capital employed increases we'd be hard-pressed to believe it's a multi-bagger going forward.

Another thing to note, PEMTRON has a high ratio of current liabilities to total assets of 45%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On PEMTRON's ROCE

While PEMTRON has impressive profitability from its capital, it isn't increasing that amount of capital. Yet to long term shareholders the stock has gifted them an incredible 146% return in the last year, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a final note, we found 3 warning signs for PEMTRON (1 shouldn't be ignored) you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.