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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Logisys (KOSDAQ:067730) 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 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. To calculate this metric for Logisys, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.023 = ₩409m ÷ (₩24b - ₩6.4b) (Based on the trailing twelve months to December 2020).
So, Logisys has an ROCE of 2.3%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 10%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Logisys' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Logisys, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
Things have been pretty stable at Logisys, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at Logisys in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.
The Key Takeaway
We can conclude that in regards to Logisys' returns on capital employed and the trends, there isn't much change to report on. Although the market must be expecting these trends to improve because the stock has gained 77% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
One more thing: We've identified 3 warning signs with Logisys (at least 1 which is concerning) , and understanding these would certainly be useful.
While Logisys 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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