What Do The Returns At KSP (KOSDAQ:073010) Mean Going Forward?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Speaking of which, we noticed some great changes in KSP's (KOSDAQ:073010) returns on capital, so let's have a look.

Understanding 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. The formula for this calculation on KSP is:

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

0.076 = ₩2.1b ÷ (₩47b - ₩19b) (Based on the trailing twelve months to December 2020).

Thus, KSP has an ROCE of 7.6%. On its own that's a low return, but compared to the average of 5.5% generated by the Machinery industry, it's much better.

See our latest analysis for KSP

Historical performance is a great place to start when researching a stock so above you can see the gauge for KSP's ROCE against it's prior returns. If you're interested in investigating KSP's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Like most people, we're pleased that KSP is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 7.6% which is no doubt a relief for some early shareholders. In regards to capital employed, KSP is using 69% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. This could potentially mean that the company is selling some of its assets.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 40% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

What We Can Learn From KSP's ROCE

In the end, KSP has proven it's capital allocation skills are good with those higher returns from less amount of capital. Although the company may be facing some issues elsewhere since the stock has plunged 95% in the last five years. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

If you want to continue researching KSP, you might be interested to know about the 3 warning signs that our analysis has discovered.

While KSP isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

When trading KSP or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.