Here’s What’s Happening With Returns At Codes Combine (KOSDAQ:047770)

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Codes Combine's (KOSDAQ:047770) returns on capital, so let's have a look.

Understanding 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 Codes Combine is:

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

0.057 = ₩3.3b ÷ (₩74b - ₩15b) (Based on the trailing twelve months to September 2020).

So, Codes Combine has an ROCE of 5.7%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 7.4%.

See our latest analysis for Codes Combine

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Codes Combine's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

We're delighted to see that Codes Combine is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 5.7% which is a sight for sore eyes. In addition to that, Codes Combine is employing 159% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a related note, the company's ratio of current liabilities to total assets has decreased to 21%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line On Codes Combine's ROCE

To the delight of most shareholders, Codes Combine has now broken into profitability. Although the company may be facing some issues elsewhere since the stock has plunged 92% in the last five years. Still, it's worth doing some further research to see if the trends will continue into the future.

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

While Codes Combine 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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