What Do The Returns On Capital At Korea Electronic Certification Authority (KOSDAQ:041460) Tell Us?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Although, when we looked at Korea Electronic Certification Authority (KOSDAQ:041460), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Korea Electronic Certification Authority:

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

0.065 = ₩2.7b ÷ (₩57b - ₩16b) (Based on the trailing twelve months to September 2020).

So, Korea Electronic Certification Authority has an ROCE of 6.5%. In absolute terms, that's a low return and it also under-performs the Professional Services industry average of 10%.

View our latest analysis for Korea Electronic Certification Authority

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Korea Electronic Certification Authority's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Korea Electronic Certification Authority Tell Us?

When we looked at the ROCE trend at Korea Electronic Certification Authority, we didn't gain much confidence. To be more specific, ROCE has fallen from 18% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Korea Electronic Certification Authority is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 21% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you'd like to know more about Korea Electronic Certification Authority, we've spotted 3 warning signs, and 1 of them is a bit concerning.

While Korea Electronic Certification Authority may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. 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.
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