The Return Trends At NVH Korea (KOSDAQ:067570) Look Promising

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at NVH Korea (KOSDAQ:067570) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on NVH Korea is:

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

0.12 = ₩78b ÷ (₩1.4t - ₩806b) (Based on the trailing twelve months to September 2024).

Therefore, NVH Korea has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 8.9% it's much better.

View our latest analysis for NVH Korea

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

The Trend Of ROCE

NVH Korea is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 12%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 62%. So we're very much inspired by what we're seeing at NVH Korea thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that NVH Korea has a current liabilities to total assets ratio of 56%, which we'd consider pretty high. 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.

The Bottom Line On NVH Korea's ROCE

All in all, it's terrific to see that NVH Korea is reaping the rewards from prior investments and is growing its capital base. Considering the stock has delivered 17% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

NVH Korea does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

While NVH Korea 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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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.