Here's What To Make Of LS Cable & System Asia's (KRX:229640) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at LS Cable & System Asia (KRX:229640) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for LS Cable & System Asia, this is the formula:

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

0.11 = ₩20b ÷ (₩409b - ₩233b) (Based on the trailing twelve months to September 2020).

So, LS Cable & System Asia has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 6.8% generated by the Electrical industry.

View our latest analysis for LS Cable & System Asia

In the above chart we have measured LS Cable & System Asia's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for LS Cable & System Asia.

What Can We Tell From LS Cable & System Asia's ROCE Trend?

In terms of LS Cable & System Asia's historical ROCE movements, the trend isn't fantastic. Around four years ago the returns on capital were 14%, but since then they've fallen to 11%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Another thing to note, LS Cable & System Asia has a high ratio of current liabilities to total assets of 57%. 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.

The Bottom Line On LS Cable & System Asia's ROCE

To conclude, we've found that LS Cable & System Asia is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 25% over the last three years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you'd like to know more about LS Cable & System Asia, we've spotted 3 warning signs, and 1 of them shouldn't be ignored.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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