What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Cuckoo Holdings (KRX:192400) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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. The formula for this calculation on Cuckoo Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = ₩99b ÷ (₩893b - ₩108b) (Based on the trailing twelve months to September 2020).
Thus, Cuckoo Holdings has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Consumer Durables industry average of 7.8% it's much better.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Cuckoo Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Cuckoo Holdings, check out these free graphs here.
How Are Returns Trending?
On the surface, the trend of ROCE at Cuckoo Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 18% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
The Bottom Line
In summary, despite lower returns in the short term, we're encouraged to see that Cuckoo Holdings is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 18% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.
One more thing, we've spotted 1 warning sign facing Cuckoo Holdings that you might find interesting.
While Cuckoo Holdings 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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