The Returns On Capital At SeA Mechanics (KOSDAQ:396300) Don't Inspire Confidence

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at SeA Mechanics (KOSDAQ:396300) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

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 SeA Mechanics is:

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

0.028 = ₩2.0b ÷ (₩102b - ₩31b) (Based on the trailing twelve months to December 2023).

Thus, SeA Mechanics has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 6.0%.

View our latest analysis for SeA Mechanics

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating SeA Mechanics' past further, check out this free graph covering SeA Mechanics' past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of SeA Mechanics' historical ROCE movements, the trend isn't fantastic. Around two years ago the returns on capital were 13%, but since then they've fallen to 2.8%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On SeA Mechanics' ROCE

In summary, SeA Mechanics is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last year, the stock has given away 47% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

SeA Mechanics does have some risks, we noticed 3 warning signs (and 2 which make us uncomfortable) we think you should know about.

While SeA Mechanics isn't earning the highest return, check out this free list of companies that are 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.