MegaMD (KOSDAQ:133750) Is Looking To Continue Growing Its Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, MegaMD (KOSDAQ:133750) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on MegaMD is:

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

0.01 = ₩681m ÷ (₩87b - ₩21b) (Based on the trailing twelve months to June 2024).

Therefore, MegaMD has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Consumer Services industry average of 16%.

See our latest analysis for MegaMD

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of MegaMD.

The Trend Of ROCE

MegaMD has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 1.0% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by MegaMD has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. 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, MegaMD has decreased current liabilities to 24% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that MegaMD has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Key Takeaway

In summary, we're delighted to see that MegaMD has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Given the stock has declined 43% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

MegaMD does have some risks though, and we've spotted 1 warning sign for MegaMD that you might be interested in.

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.