Returns On Capital - An Important Metric For Formetal (KOSDAQ:119500)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 Formetal (KOSDAQ:119500) and its trend of ROCE, we really liked what we saw.

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

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 Formetal is:

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

0.037 = ₩1.8b ÷ (₩63b - ₩13b) (Based on the trailing twelve months to September 2020).

Therefore, Formetal has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.4%.

View our latest analysis for Formetal

Historical performance is a great place to start when researching a stock so above you can see the gauge for Formetal's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Formetal, check out these free graphs here.

How Are Returns Trending?

While the ROCE isn't as high as some other companies out there, it's great to see it's on the up. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 834% over the last five years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

In Conclusion...

To bring it all together, Formetal has done well to increase the returns it's generating from its capital employed. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 37% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

Like most companies, Formetal does come with some risks, and we've found 1 warning sign that you should be aware of.

While Formetal 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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