Returns On Capital Are Showing Encouraging Signs At KANGWON ENERGY (KOSDAQ:114190)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 KANGWON ENERGY (KOSDAQ:114190) and its trend of ROCE, we really liked what we saw.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

0.091 = ₩8.7b ÷ (₩148b - ₩53b) (Based on the trailing twelve months to September 2024).

Therefore, KANGWON ENERGY has an ROCE of 9.1%. On its own that's a low return, but compared to the average of 6.5% generated by the Machinery industry, it's much better.

See our latest analysis for KANGWON ENERGY

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're interested in investigating KANGWON ENERGY's past further, check out this free graph covering KANGWON ENERGY's past earnings, revenue and cash flow.

What Does the ROCE Trend For KANGWON ENERGY Tell Us?

KANGWON ENERGY has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 9.1% on its capital. Not only that, but the company is utilizing 119% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

What We Can Learn From KANGWON ENERGY's ROCE

To the delight of most shareholders, KANGWON ENERGY has now broken into profitability. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if KANGWON ENERGY can keep these trends up, it could have a bright future ahead.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for KANGWON ENERGY (of which 1 is concerning!) that you should know about.

While KANGWON ENERGY 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.