Korea Electronic Certification Authority (KOSDAQ:041460) Could Be Struggling To Allocate Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Korea Electronic Certification Authority (KOSDAQ:041460), we don't think it's current trends fit the mold of a multi-bagger.

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 Korea Electronic Certification Authority, this is the formula:

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

0.051 = ₩2.8b ÷ (₩73b - ₩18b) (Based on the trailing twelve months to June 2024).

Therefore, Korea Electronic Certification Authority has an ROCE of 5.1%. Ultimately, that's a low return and it under-performs the Professional Services industry average of 10%.

See our latest analysis for Korea Electronic Certification Authority

Historical performance is a great place to start when researching a stock so above you can see the gauge for Korea Electronic Certification Authority's ROCE against it's prior returns. If you're interested in investigating Korea Electronic Certification Authority's past further, check out this free graph covering Korea Electronic Certification Authority's past earnings, revenue and cash flow.

So How Is Korea Electronic Certification Authority's ROCE Trending?

When we looked at the ROCE trend at Korea Electronic Certification Authority, we didn't gain much confidence. Around five years ago the returns on capital were 9.1%, but since then they've fallen to 5.1%. 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.

In Conclusion...

In summary, Korea Electronic Certification Authority is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last five years, the stock has given away 22% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a separate note, we've found 2 warning signs for Korea Electronic Certification Authority you'll probably want to know about.

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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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.