We Like These Underlying Trends At Silla TextileLtd (KOSDAQ:001000)

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. With that in mind, we've noticed some promising trends at Silla TextileLtd (KOSDAQ:001000) so let's look a bit deeper.

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. The formula for this calculation on Silla TextileLtd is:

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

0.031 = ₩515m ÷ (₩32b - ₩16b) (Based on the trailing twelve months to September 2020).

So, Silla TextileLtd has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 7.4%.

Check out our latest analysis for Silla TextileLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Silla TextileLtd's ROCE against it's prior returns. If you're interested in investigating Silla TextileLtd's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Silla TextileLtd's ROCE Trending?

It's great to see that Silla TextileLtd has started to generate some pre-tax earnings from prior investments. While the business is profitable now, it used to be incurring losses on invested capital five years ago. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 44%. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 49% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line On Silla TextileLtd's ROCE

In the end, Silla TextileLtd has proven it's capital allocation skills are good with those higher returns from less amount of capital. And since the stock has fallen 10% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Silla TextileLtd (of which 1 is potentially serious!) that you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. 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.
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