Austem (KOSDAQ:031510) Is Looking To Continue Growing Its Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Austem (KOSDAQ:031510) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Austem, this is the formula:

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

0.09 = ₩9.3b ÷ (₩154b - ₩51b) (Based on the trailing twelve months to June 2024).

So, Austem has an ROCE of 9.0%. Even though it's in line with the industry average of 9.1%, it's still a low return by itself.

See our latest analysis for Austem

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'd like to look at how Austem has performed in the past in other metrics, you can view this free graph of Austem's past earnings, revenue and cash flow.

So How Is Austem's ROCE Trending?

We're pretty happy with how the ROCE has been trending at Austem. The figures show that over the last five years, returns on capital have grown by 390%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, Austem appears to been achieving more with less, since the business is using 24% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

One more thing to note, Austem has decreased current liabilities to 33% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Bottom Line

In the end, Austem has proven it's capital allocation skills are good with those higher returns from less amount of capital. And since the stock has fallen 36% 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.

If you'd like to know more about Austem, we've spotted 2 warning signs, and 1 of them is potentially serious.

While Austem may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.