Returns On Capital - An Important Metric For Cape Industries (KOSDAQ:064820)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. So when we looked at Cape Industries (KOSDAQ:064820) and its trend of ROCE, we really liked what we saw.

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. Analysts use this formula to calculate it for Cape Industries:

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

0.0064 = ₩19b ÷ (₩3.0t - ₩52b) (Based on the trailing twelve months to September 2020).

So, Cape Industries has an ROCE of 0.6%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.4%.

View our latest analysis for Cape Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for Cape Industries' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Cape Industries, check out these free graphs here.

So How Is Cape Industries' ROCE Trending?

Cape Industries has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 0.6% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Cape Industries is utilizing 3,229% 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.

One more thing to note, Cape Industries has decreased current liabilities to 1.7% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Cape Industries has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Key Takeaway

In summary, it's great to see that Cape Industries has managed to break into profitability and is continuing to reinvest in its business. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a final note, we've found 2 warning signs for Cape Industries that we think you should be aware of.

While Cape Industries 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. 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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