Will KT's (KRX:030200) Growth In ROCE Persist?

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at KT (KRX:030200) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for KT:

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

0.043 = ₩1.0t ÷ (₩33t - ₩9.2t) (Based on the trailing twelve months to March 2020).

Thus, KT has an ROCE of 4.3%. Ultimately, that's a low return and it under-performs the Telecom industry average of 8.3%.

View our latest analysis for KT

Above you can the how the current ROCE for KT's compares to it's prior returns on capital, but you can only tell so much from the past. If you'd like, you can check out the forecasts from the analysts covering KT here for free.

The Trend Of ROCE

Shareholders will be relieved that KT has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 4.3%, which is always encouraging. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.

In Conclusion...

As discussed above, KT appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And since the stock has fallen 4.0% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a separate note, we've found 2 warning signs for KT you'll probably want to know about.

While KT 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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