We Like These Underlying Return On Capital Trends At Y2 Solution (KRX:011690)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 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. The formula for this calculation on Y2 Solution is:

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

0.047 = ₩5.3b ÷ (₩141b - ₩27b) (Based on the trailing twelve months to June 2024).

Thus, Y2 Solution has an ROCE of 4.7%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 8.3%.

View 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're interested in investigating Y2 Solution's past further, check out this free graph covering Y2 Solution's past earnings, revenue and cash flow.

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

Shareholders will be relieved that Y2 Solution has broken into profitability. The company now earns 4.7% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 19%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

In Conclusion...

To sum it up, Y2 Solution is collecting higher returns from the same amount of capital, and that's impressive. However the stock is down a substantial 95% in the last five years so there could be other areas of the business hurting its prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

One more thing to note, we've identified 3 warning signs with Y2 Solution and understanding these should be part of your investment process.

While Y2 Solution 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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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.