Returns On Capital At Seojin SystemLtd (KOSDAQ:178320) Paint An Interesting Picture

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 Seojin SystemLtd (KOSDAQ:178320), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Seojin SystemLtd is:

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

0.013 = ₩6.2b ÷ (₩677b - ₩209b) (Based on the trailing twelve months to September 2020).

So, Seojin SystemLtd has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 7.2%.

View our latest analysis for Seojin SystemLtd

Above you can see how the current ROCE for Seojin SystemLtd 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 report on analyst forecasts for the company.

What Does the ROCE Trend For Seojin SystemLtd Tell Us?

Unfortunately, the trend isn't great with ROCE falling from 34% five years ago, while capital employed has grown 784%. 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. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Seojin SystemLtd might not have received a full period of earnings contribution from it.

On a related note, Seojin SystemLtd has decreased its current liabilities to 31% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Seojin SystemLtd's ROCE

We're a bit apprehensive about Seojin SystemLtd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Since the stock has skyrocketed 210% over the last three years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Seojin SystemLtd does have some risks, we noticed 2 warning signs (and 1 which can't be ignored) we think you should know about.

While Seojin SystemLtd 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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