What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we’d like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Guyoung Technology (KOSDAQ:053270), we don’t think it’s current trends fit the mold of a multi-bagger.
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. To calculate this metric for Guyoung Technology, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.026 = ₩2.9b ÷ (₩212b – ₩99b) (Based on the trailing twelve months to December 2020).
So, Guyoung Technology has an ROCE of 2.6%. In absolute terms, that’s a low return and it also under-performs the Auto Components industry average of 5.1%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Guyoung Technology’s ROCE against it’s prior returns. If you want to delve into the historical earnings, revenue and cash flow of Guyoung Technology, check out these free graphs here.
What Can We Tell From Guyoung Technology’s ROCE Trend?
When we looked at the ROCE trend at Guyoung Technology, we didn’t gain much confidence. To be more specific, ROCE has fallen from 6.7% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven’t increased.
On a side note, Guyoung Technology’s current liabilities are still rather high at 47% of total assets. 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.
Our Take On Guyoung Technology’s ROCE
We’re a bit apprehensive about Guyoung Technology because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Yet despite these poor fundamentals, the stock has gained a huge 121% over the last five years, so investors appear very optimistic. Regardless, we don’t feel too comfortable with the fundamentals so we’d be steering clear of this stock for now.
If you want to know some of the risks facing Guyoung Technology we’ve found 7 warning signs (2 are a bit unpleasant!) that you should be aware of before investing here.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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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