Returns On Capital At Englewood Lab (KOSDAQ:950140) Paint An Interesting Picture

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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Englewood Lab (KOSDAQ:950140) 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 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 Englewood Lab is:

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

0.078 = ₩6.5b ÷ (₩128b - ₩44b) (Based on the trailing twelve months to September 2020).

So, Englewood Lab has an ROCE of 7.8%. In absolute terms, that's a low return and it also under-performs the Professional Services industry average of 10%.

Check out our latest analysis for Englewood Lab

In the above chart we have measured Englewood Lab's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Englewood Lab.

What Does the ROCE Trend For Englewood Lab Tell Us?

In terms of Englewood Lab's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 40%, but since then they've fallen to 7.8%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 34%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 7.8%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Key Takeaway

To conclude, we've found that Englewood Lab is reinvesting in the business, but returns have been falling. Since the stock has declined 21% over the last three years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One more thing to note, we've identified 2 warning signs with Englewood Lab and understanding them should be part of your investment process.

While Englewood Lab 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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