Creative & Innovative System (KOSDAQ:222080) Is Very Good At Capital Allocation

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Creative & Innovative System's (KOSDAQ:222080) 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. Analysts use this formula to calculate it for Creative & Innovative System:

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

0.20 = ₩60b ÷ (₩619b - ₩328b) (Based on the trailing twelve months to March 2024).

Thus, Creative & Innovative System has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Machinery industry average of 6.3%.

View our latest analysis for Creative & Innovative System

In the above chart we have measured Creative & Innovative System's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Creative & Innovative System .

What Does the ROCE Trend For Creative & Innovative System Tell Us?

The fact that Creative & Innovative System is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 20% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Creative & Innovative System is utilizing 505% 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.

One more thing to note, Creative & Innovative System has decreased current liabilities to 53% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

The Bottom Line

Long story short, we're delighted to see that Creative & Innovative System's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a staggering 419% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

Creative & Innovative System does have some risks, we noticed 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.