Should We Be Excited About The Trends Of Returns At Castelbajac (KOSDAQ:308100)?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. In light of that, when we looked at Castelbajac (KOSDAQ:308100) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Castelbajac is:

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

0.074 = ₩6.9b ÷ (₩110b - ₩16b) (Based on the trailing twelve months to September 2020).

So, Castelbajac has an ROCE of 7.4%. Even though it's in line with the industry average of 7.4%, it's still a low return by itself.

See our latest analysis for Castelbajac

In the above chart we have measured Castelbajac's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Castelbajac here for free.

The Trend Of ROCE

On the surface, the trend of ROCE at Castelbajac doesn't inspire confidence. To be more specific, ROCE has fallen from 18% over the last one year. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line On Castelbajac's ROCE

We're a bit apprehensive about Castelbajac because despite more capital being deployed in the business, returns on that capital and sales have both fallen. However the stock has delivered a 12% return to shareholders over the last year, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Castelbajac does come with some risks though, we found 5 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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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