Creas F&CLtd (KOSDAQ:110790) Is Reinvesting At Lower Rates Of Return

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Creas F&CLtd (KOSDAQ:110790), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Creas F&CLtd, this is the formula:

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

0.057 = ₩23b ÷ (₩712b - ₩309b) (Based on the trailing twelve months to September 2024).

Thus, Creas F&CLtd has an ROCE of 5.7%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 7.2%.

See our latest analysis for Creas F&CLtd

Above you can see how the current ROCE for Creas F&CLtd 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 Creas F&CLtd for free.

What Can We Tell From Creas F&CLtd's ROCE Trend?

Unfortunately, the trend isn't great with ROCE falling from 18% five years ago, while capital employed has grown 91%. That being said, Creas F&CLtd raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Creas F&CLtd probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a side note, Creas F&CLtd's current liabilities have increased over the last five years to 43% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

What We Can Learn From Creas F&CLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Creas F&CLtd's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 34% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Creas F&CLtd has the makings of a multi-bagger.

Creas F&CLtd does come with some risks though, we found 5 warning signs in our investment analysis, and 2 of those don't sit too well with us...

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.