What Can The Trends At AmogreentechLtd (KOSDAQ:125210) Tell Us About Their Returns?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 AmogreentechLtd's (KOSDAQ:125210) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for AmogreentechLtd, this is the formula:

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

0.017 = ₩915m ÷ (₩102b - ₩47b) (Based on the trailing twelve months to September 2020).

Thus, AmogreentechLtd has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 6.5%.

See our latest analysis for AmogreentechLtd

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, revenue and cash flow of AmogreentechLtd, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

The fact that AmogreentechLtd is now generating some pre-tax profits from its prior investments is very encouraging. About two years ago the company was generating losses but things have turned around because it's now earning 1.7% on its capital. Not only that, but the company is utilizing 347% more capital than before, but that's to be expected from a company trying to break into profitability. 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.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 46%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

The Bottom Line

In summary, it's great to see that AmogreentechLtd has managed to break into profitability and is continuing to reinvest in its business. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 19% return over the last year. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing to note, we've identified 1 warning sign with AmogreentechLtd and understanding this should be part of your investment process.

While AmogreentechLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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