What We Make Of KSP's (KOSDAQ:073010) Returns On Capital

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, KSP (KOSDAQ:073010) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What is it?

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. To calculate this metric for KSP, this is the formula:

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

0.064 = ₩1.8b ÷ (₩46b - ₩18b) (Based on the trailing twelve months to September 2020).

Thus, KSP has an ROCE of 6.4%. On its own, that's a low figure but it's around the 5.4% average generated by the Machinery industry.

Check out 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 want to delve into the historical earnings, revenue and cash flow of KSP, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

We're delighted to see that KSP is reaping rewards from its investments and has now broken into profitability. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 6.4% on their capital employed. In regards to capital employed, KSP is using 70% 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. KSP could be selling under-performing assets since the ROCE is improving.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 39% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

Our Take On KSP's ROCE

From what we've seen above, KSP has managed to increase it's returns on capital all the while reducing it's capital base. And since the stock has dived 95% over the last five years, there may be other factors affecting the company's prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

KSP does have some risks though, and we've spotted 2 warning signs for KSP that you might be interested in.

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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