Syswork (KOSDAQ:269620) Will Be Hoping To Turn Its Returns On Capital Around

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Syswork (KOSDAQ:269620) 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)

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. To calculate this metric for Syswork, this is the formula:

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

0.0011 = ₩73m ÷ (₩96b - ₩31b) (Based on the trailing twelve months to December 2020).

Therefore, Syswork has an ROCE of 0.1%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.7%.

See our latest analysis for Syswork

Historical performance is a great place to start when researching a stock so above you can see the gauge for Syswork's ROCE against it's prior returns. If you'd like to look at how Syswork has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Syswork's ROCE Trending?

Unfortunately, the trend isn't great with ROCE falling from 25% five years ago, while capital employed has grown 522%. Usually this isn't ideal, but given Syswork 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 Syswork might not have received a full period of earnings contribution from it.

On a side note, Syswork's current liabilities have increased over the last five years to 32% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 0.1%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

Our Take On Syswork's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Syswork is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 85% to shareholders over the last three years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

One final note, you should learn about the 6 warning signs we've spotted with Syswork (including 3 which are a bit unpleasant) .

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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