Returns Are Gaining Momentum At Y2 Solution (KRX:011690)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Y2 Solution (KRX:011690) looks quite promising in regards to its trends of return on capital.

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

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 Y2 Solution, this is the formula:

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

0.044 = ₩4.9b ÷ (₩132b - ₩19b) (Based on the trailing twelve months to September 2024).

Thus, Y2 Solution has an ROCE of 4.4%. Ultimately, that's a low return and it under-performs the Electrical industry average of 7.7%.

Check out our latest analysis for Y2 Solution

Historical performance is a great place to start when researching a stock so above you can see the gauge for Y2 Solution's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Y2 Solution.

What Can We Tell From Y2 Solution's ROCE Trend?

Y2 Solution 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 4.4% on its capital. While returns have increased, the amount of capital employed by Y2 Solution has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

One more thing to note, Y2 Solution has decreased current liabilities to 15% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Y2 Solution has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line On Y2 Solution's ROCE

As discussed above, Y2 Solution appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Although the company may be facing some issues elsewhere since the stock has plunged 95% in the last five years. Still, it's worth doing some further research to see if the trends will continue into the future.

On a separate note, we've found 2 warning signs for Y2 Solution you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.