Returns Are Gaining Momentum At KANGWON ENERGY (KOSDAQ:114190)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in KANGWON ENERGY's (KOSDAQ:114190) returns on capital, so let's have a look.

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. The formula for this calculation on KANGWON ENERGY is:

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

0.10 = ₩6.6b ÷ (₩172b - ₩108b) (Based on the trailing twelve months to December 2023).

Therefore, KANGWON ENERGY has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 6.7% generated by the Machinery industry.

View our latest analysis for KANGWON ENERGY

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

How Are Returns Trending?

The fact that KANGWON ENERGY is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 10% on its capital. And unsurprisingly, like most companies trying to break into the black, KANGWON ENERGY is utilizing 26% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

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. Essentially the business now has suppliers or short-term creditors funding about 63% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line On KANGWON ENERGY's ROCE

To the delight of most shareholders, KANGWON ENERGY has now broken into profitability. And a remarkable 524% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you'd like to know more about KANGWON ENERGY, we've spotted 4 warning signs, and 2 of them shouldn't be ignored.

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.

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

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.