Can Kbi Metal (KOSDAQ:024840) Continue To Grow Its Returns On Capital?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Speaking of which, we noticed some great changes in Kbi Metal's (KOSDAQ:024840) returns on capital, so let's have a look.

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. To calculate this metric for Kbi Metal, this is the formula:

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

0.13 = ₩15b ÷ (₩232b - ₩114b) (Based on the trailing twelve months to September 2020).

Therefore, Kbi Metal has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 4.6% it's much better.

Check out our latest analysis for Kbi Metal

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kbi Metal's ROCE against it's prior returns. If you're interested in investigating Kbi Metal's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

We're delighted to see that Kbi Metal is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 13% which is a sight for sore eyes. In addition to that, Kbi Metal is employing 46% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a side note, Kbi Metal's current liabilities are still rather high at 49% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

Overall, Kbi Metal gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Given the stock has declined 60% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

Kbi Metal does have some risks, we noticed 3 warning signs (and 1 which is a bit concerning) we think you should know about.

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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