Is There More Growth In Store For Kolon Global's (KRX:003070) Returns On Capital?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. So on that note, Kolon Global (KRX:003070) looks quite promising in regards to its trends of return on capital.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Kolon Global, this is the formula:

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

0.19 = ₩159b ÷ (₩2.2t - ₩1.4t) (Based on the trailing twelve months to September 2020).

Therefore, Kolon Global has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 9.4% generated by the Construction industry.

See our latest analysis for Kolon Global

In the above chart we have measured Kolon Global'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 report on analyst forecasts for the company.

What Does the ROCE Trend For Kolon Global Tell Us?

Kolon Global has broken into the black (profitability) and we're sure it's a sight for sore eyes. While the business was unprofitable in the past, it's now turned things around and is earning 19% on its capital. While returns have increased, the amount of capital employed by Kolon Global has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.

On a separate but related note, it's important to know that Kolon Global has a current liabilities to total assets ratio of 62%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

In summary, we're delighted to see that Kolon Global has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a solid 49% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing, we've spotted 2 warning signs facing Kolon Global that you might find interesting.

While Kolon Global 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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