Returns On Capital Are Showing Encouraging Signs At ENERGY&MACHINERY KOREALtd (KOSDAQ:095190)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at ENERGY&MACHINERY KOREALtd (KOSDAQ:095190) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for ENERGY&MACHINERY KOREALtd, this is the formula:

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

0.0091 = ₩1.0b ÷ (₩224b - ₩114b) (Based on the trailing twelve months to March 2024).

Therefore, ENERGY&MACHINERY KOREALtd has an ROCE of 0.9%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 7.4%.

Check out our latest analysis for ENERGY&MACHINERY KOREALtd

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of ENERGY&MACHINERY KOREALtd.

What The Trend Of ROCE Can Tell Us

Shareholders will be relieved that ENERGY&MACHINERY KOREALtd has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 0.9% on its capital. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

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 51% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

The Bottom Line

In summary, we're delighted to see that ENERGY&MACHINERY KOREALtd has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Astute investors may have an opportunity here because the stock has declined 54% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

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

While ENERGY&MACHINERY KOREALtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.