Zero to Seven (KOSDAQ:159580) Is Experiencing Growth In Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Zero to Seven (KOSDAQ:159580) so let's look a bit deeper.

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. To calculate this metric for Zero to Seven, this is the formula:

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

0.028 = ₩2.3b ÷ (₩89b - ₩7.3b) (Based on the trailing twelve months to December 2023).

So, Zero to Seven has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 9.1%.

Check out our latest analysis for Zero to Seven

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

What Can We Tell From Zero to Seven's ROCE Trend?

Shareholders will be relieved that Zero to Seven has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 2.8% on its capital. While returns have increased, the amount of capital employed by Zero to Seven has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

One more thing to note, Zero to Seven has decreased current liabilities to 8.2% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Key Takeaway

To bring it all together, Zero to Seven has done well to increase the returns it's generating from its capital employed. Astute investors may have an opportunity here because the stock has declined 21% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

Zero to Seven does have some risks though, and we've spotted 3 warning signs for Zero to Seven that you might be interested in.

While Zero to Seven 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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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.