SPECO (KOSDAQ:013810) Knows How To Allocate Capital Effectively

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. And in light of that, the trends we're seeing at SPECO's (KOSDAQ:013810) look very promising so lets take a look.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for SPECO:

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

0.28 = ₩13b ÷ (₩91b - ₩46b) (Based on the trailing twelve months to September 2020).

So, SPECO has an ROCE of 28%. That's a fantastic return and not only that, it outpaces the average of 9.0% earned by companies in a similar industry.

View our latest analysis for SPECO

Above you can see how the current ROCE for SPECO compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for SPECO.

So How Is SPECO's ROCE Trending?

SPECO has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 153%. The company is now earning ₩0.3 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 36% less than it was five years ago, which can be indicative of a business that's improving its efficiency. SPECO may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

On a separate but related note, it's important to know that SPECO has a current liabilities to total assets ratio of 51%, which we'd consider pretty high. 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.

In Conclusion...

In summary, it's great to see that SPECO has been able to turn things around and earn higher returns on lower amounts of capital. And with a respectable 100% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a separate note, we've found 3 warning signs for SPECO you'll probably want to know about.

SPECO is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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