Can Alton SportsLtd (KOSDAQ:123750) Continue To Grow Its Returns On Capital?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Alton SportsLtd (KOSDAQ:123750) looks quite promising in regards to its trends of return on capital.

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 Alton SportsLtd, this is the formula:

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

0.058 = ₩1.2b ÷ (₩38b - ₩17b) (Based on the trailing twelve months to September 2020).

Thus, Alton SportsLtd has an ROCE of 5.8%. Ultimately, that's a low return and it under-performs the Leisure industry average of 8.4%.

See our latest analysis for Alton SportsLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Alton SportsLtd's ROCE against it's prior returns. If you'd like to look at how Alton SportsLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Alton SportsLtd's ROCE Trending?

We're pretty happy with how the ROCE has been trending at Alton SportsLtd. The data shows that returns on capital have increased by 245% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Interestingly, the business may be becoming more efficient because it's applying 63% less capital than it was five years ago. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

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 44% 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.

What We Can Learn From Alton SportsLtd's ROCE

In summary, it's great to see that Alton SportsLtd has been able to turn things around and earn higher returns on lower amounts of capital. And since the stock has fallen 30% 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.

Like most companies, Alton SportsLtd does come with some risks, and we've found 3 warning signs that you should be aware of.

While Alton SportsLtd 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.

If you decide to trade Alton SportsLtd, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.