Can Jeongsan AikangLtd (KOSDAQ:022220) Continue To Grow Its Returns On Capital?

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'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Jeongsan AikangLtd (KOSDAQ:022220) so let's look a bit deeper.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Jeongsan AikangLtd:

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

0.094 = ₩8.2b ÷ (₩96b - ₩8.2b) (Based on the trailing twelve months to September 2020).

Therefore, Jeongsan AikangLtd has an ROCE of 9.4%. In absolute terms, that's a low return, but it's much better than the Building industry average of 4.0%.

Check out our latest analysis for Jeongsan AikangLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jeongsan AikangLtd's ROCE against it's prior returns. If you'd like to look at how Jeongsan AikangLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Jeongsan AikangLtd Tell Us?

We're delighted to see that Jeongsan AikangLtd is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 9.4% on its capital. And unsurprisingly, like most companies trying to break into the black, Jeongsan AikangLtd is utilizing 50% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a related note, the company's ratio of current liabilities to total assets has decreased to 8.5%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Jeongsan AikangLtd has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Key Takeaway

Long story short, we're delighted to see that Jeongsan AikangLtd's reinvestment activities have paid off and the company is now profitable. Astute investors may have an opportunity here because the stock has declined 14% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

Like most companies, Jeongsan AikangLtd does come with some risks, and we've found 3 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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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