There Are Reasons To Feel Uneasy About Englewood Lab's (KOSDAQ:950140) Returns On Capital

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'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. In light of that, when we looked at Englewood Lab (KOSDAQ:950140) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Englewood Lab, this is the formula:

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

0.10 = ₩7.9b ÷ (₩109b - ₩31b) (Based on the trailing twelve months to December 2020).

Therefore, Englewood Lab has an ROCE of 10%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Professional Services industry average of 12%.

See our latest analysis for Englewood Lab

Above you can see how the current ROCE for Englewood Lab compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Englewood Lab here for free.

What Does the ROCE Trend For Englewood Lab Tell Us?

When we looked at the ROCE trend at Englewood Lab, we didn't gain much confidence. To be more specific, ROCE has fallen from 40% over the last five years. However it looks like Englewood Lab might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

To conclude, we've found that Englewood Lab is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 27% over the last three years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you'd like to know about the risks facing Englewood Lab, we've discovered 2 warning signs that you should be aware of.

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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