WavusLtd (KOSDAQ:336060) Could Be Struggling To Allocate Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. 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 WavusLtd (KOSDAQ:336060) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for WavusLtd:

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

0.12 = ₩4.2b ÷ (₩49b - ₩14b) (Based on the trailing twelve months to March 2024).

So, WavusLtd has an ROCE of 12%. By itself that's a normal return on capital and it's in line with the industry's average returns of 12%.

See our latest analysis for WavusLtd

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

So How Is WavusLtd's ROCE Trending?

In terms of WavusLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 22% over the last two 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.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for WavusLtd. And the stock has followed suit returning a meaningful 7.8% to shareholders over the last year. 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.

On a separate note, we've found 1 warning sign for WavusLtd you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.