Returns On Capital At ESTec (KOSDAQ:069510) Paint An Interesting Picture

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at ESTec (KOSDAQ:069510), it didn't seem to tick all of these boxes.

What is 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. The formula for this calculation on ESTec is:

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

0.058 = ₩9.5b ÷ (₩221b - ₩56b) (Based on the trailing twelve months to September 2020).

Therefore, ESTec has an ROCE of 5.8%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 8.3%.

View our latest analysis for ESTec

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

So How Is ESTec's ROCE Trending?

When we looked at the ROCE trend at ESTec, we didn't gain much confidence. To be more specific, ROCE has fallen from 13% over the last five years. However it looks like ESTec 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'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.

On a side note, ESTec has done well to pay down its current liabilities to 25% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On ESTec's ROCE

To conclude, we've found that ESTec is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 20% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One more thing, we've spotted 2 warning signs facing ESTec that you might find interesting.

While ESTec isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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