Me2on's (KOSDAQ:201490) Returns On Capital Not Reflecting Well On The Business

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. In light of that, when we looked at Me2on (KOSDAQ:201490) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Me2on, this is the formula:

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

0.08 = ₩20b ÷ (₩282b - ₩31b) (Based on the trailing twelve months to June 2024).

Thus, Me2on has an ROCE of 8.0%. On its own that's a low return, but compared to the average of 6.6% generated by the Hospitality industry, it's much better.

View our latest analysis for Me2on

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're interested in investigating Me2on's past further, check out this free graph covering Me2on's past earnings, revenue and cash flow.

What Does the ROCE Trend For Me2on Tell Us?

When we looked at the ROCE trend at Me2on, we didn't gain much confidence. Around five years ago the returns on capital were 35%, but since then they've fallen to 8.0%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Me2on has decreased its current liabilities to 11% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Me2on's ROCE

In summary, Me2on is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Moreover, since the stock has crumbled 71% over the last five years, it appears investors are expecting the worst. Therefore based on the analysis done in this article, we don't think Me2on has the makings of a multi-bagger.

On a final note, we found 2 warning signs for Me2on (1 is potentially serious) you should be aware of.

While Me2on 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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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.