Returns On Capital Are Showing Encouraging Signs At Oriental Precision & EngineeringLtd (KOSDAQ:014940)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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 Oriental Precision & EngineeringLtd (KOSDAQ:014940) 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. Analysts use this formula to calculate it for Oriental Precision & EngineeringLtd:

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

0.099 = ₩14b ÷ (₩204b - ₩58b) (Based on the trailing twelve months to March 2024).

Therefore, Oriental Precision & EngineeringLtd has an ROCE of 9.9%. On its own that's a low return, but compared to the average of 6.7% generated by the Machinery industry, it's much better.

View our latest analysis for Oriental Precision & EngineeringLtd

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 Oriental Precision & EngineeringLtd's past further, check out this free graph covering Oriental Precision & EngineeringLtd's past earnings, revenue and cash flow.

The Trend Of ROCE

The fact that Oriental Precision & EngineeringLtd is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 9.9% on its capital. In addition to that, Oriental Precision & EngineeringLtd is employing 406% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a related note, the company's ratio of current liabilities to total assets has decreased to 28%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Key Takeaway

Long story short, we're delighted to see that Oriental Precision & EngineeringLtd's reinvestment activities have paid off and the company is now profitable. And a remarkable 361% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a final note, we've found 1 warning sign for Oriental Precision & EngineeringLtd that we think you should be aware of.

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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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.