Did you know that there are some financial metrics that can give clues to a potential multibagger? Firstly, we want to see a growing return on the capital employed (ROCE) and then alongside it an ever increasing base of the capital employed. This shows us that it is a compound interest machine that is able to continuously reinvest its profits in the company and generate higher returns. With this in mind, we have YM technology (KOSDAQ:273640) and its ROCE development, we were not exactly thrilled.

Understanding Return on Capital Employed (ROCE)

For those who don’t know, ROCE is a measure of a company’s annual profit before tax (its return) relative to the capital employed in the business. Analysts use this formula to calculate it for YM Tech:

Return on capital = earnings before interest and taxes (EBIT) ÷ (total assets – current liabilities)

0.072 = ₩4.1 billion ÷ (₩61 billion – ₩5.2 billion) (Based on the last twelve months to March 2024).

So, YM Tech has a ROCE of 7.2%. In absolute terms, this is a low return, but it is roughly in line with the industry average for the electrical industry of 8.1%.

Check out our latest analysis for YM Tech

Historical performance is a good place to start when analyzing a stock. Above you can see YM Tech’s ROCE value compared to past returns. If you want to delve into historical returns, check out these free Charts with detailed information on YM Tech’s sales and cash flow development.

How are returns developing?

As for YM Tech’s historical ROCE movements, the trend is not fantastic. About five years ago, the return on capital was 21%, but since then it has fallen to 7.2%. This is a little concerning given that the company is deploying more capital while revenues have been declining. This could mean that the company is losing its competitive advantage or market share because even though more money is being put into ventures, it is actually getting a lower return – “less bang for the buck” per se.

Finally…

We are a little concerned about YM Tech because even though more capital has been invested in the company, both return on capital and revenues have declined. Long-term shareholders who have owned the stock over the last year have seen their value fall by 27%. So it seems the market doesn’t like these trends either. Given the less than great underlying trends in these areas, we would consider looking elsewhere.

However, YM Tech carries some risks and we have found 2 warning signs for YM Tech that might interest you.

If you want to look for solid companies with high returns, check out this free List of companies with good balance sheets and impressive return on equity.

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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.