Should We Be Excited About The Trends Of Returns At Rothwell International (KOSDAQ:900260)?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Although, when we looked at Rothwell International (KOSDAQ:900260), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Rothwell International, this is the formula:

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

0.00039 = ₩102m ÷ (₩329b - ₩72b) (Based on the trailing twelve months to September 2020).

So, Rothwell International has an ROCE of 0.04%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 4.1%.

View our latest analysis for Rothwell International

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're interested in investigating Rothwell International's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

We weren't thrilled with the trend because Rothwell International's ROCE has reduced by 100% over the last five years, while the business employed 321% more capital. Usually this isn't ideal, but given Rothwell International 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 Rothwell International might not have received a full period of earnings contribution from it.

On a related note, Rothwell International has decreased its current liabilities to 22% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Rothwell International'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 Rothwell International. But since the stock has dived 80% in the last three years, there could be other drivers that are influencing the business' outlook. Therefore, we'd suggest researching the stock further to uncover more about the business.

If you'd like to know more about Rothwell International, we've spotted 3 warning signs, and 1 of them is concerning.

While Rothwell International 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. 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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