Be Wary Of Koryo Credit Information (KOSDAQ:049720) And Its Returns On Capital

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 when we looked at Koryo Credit Information (KOSDAQ:049720), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

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. The formula for this calculation on Koryo Credit Information is:

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

0.26 = ₩10b ÷ (₩70b - ₩30b) (Based on the trailing twelve months to December 2020).

So, Koryo Credit Information has an ROCE of 26%. That's a fantastic return and not only that, it outpaces the average of 10% earned by companies in a similar industry.

View our latest analysis for Koryo Credit Information

Historical performance is a great place to start when researching a stock so above you can see the gauge for Koryo Credit Information's ROCE against it's prior returns. If you'd like to look at how Koryo Credit Information has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Koryo Credit Information's ROCE Trending?

On the surface, the trend of ROCE at Koryo Credit Information doesn't inspire confidence. Historically returns on capital were even higher at 32%, but they have dropped over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Koryo Credit Information's current liabilities are still rather high at 42% of total assets. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Koryo Credit Information's ROCE

While returns have fallen for Koryo Credit Information in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has done incredibly well with a 217% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you want to know some of the risks facing Koryo Credit Information we've found 2 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

Koryo Credit Information is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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