Stock Analysis

Should You Be Impressed By NVH Korea's (KOSDAQ:067570) Returns on Capital?

KOSDAQ:A067570
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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at NVH Korea (KOSDAQ:067570) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is 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 NVH Korea, this is the formula:

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

0.06 = ₩27b ÷ (₩901b - ₩447b) (Based on the trailing twelve months to September 2020).

Therefore, NVH Korea has an ROCE of 6.0%. In absolute terms, that's a low return, but it's much better than the Auto Components industry average of 4.6%.

See our latest analysis for NVH Korea

roce
KOSDAQ:A067570 Return on Capital Employed November 21st 2020

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

What Can We Tell From NVH Korea's ROCE Trend?

Unfortunately, the trend isn't great with ROCE falling from 10.0% five years ago, while capital employed has grown 179%. Usually this isn't ideal, but given NVH Korea conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence NVH Korea might not have received a full period of earnings contribution from it.

Another thing to note, NVH Korea has a high ratio of current liabilities to total assets of 50%. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On NVH Korea's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for NVH Korea. And the stock has followed suit returning a meaningful 51% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

One final note, you should learn about the 5 warning signs we've spotted with NVH Korea (including 2 which is are concerning) .

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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