Silla Sg's (KOSDAQ:025870) Returns On Capital Not Reflecting Well On The Business

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 Silla Sg (KOSDAQ:025870) and its ROCE trend, we weren't exactly thrilled.

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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. Analysts use this formula to calculate it for Silla Sg:

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

0.036 = ₩1.1b ÷ (₩46b - ₩14b) (Based on the trailing twelve months to December 2024).

Therefore, Silla Sg has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Food industry average of 7.5%.

See our latest analysis for Silla Sg

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

How Are Returns Trending?

When we looked at the ROCE trend at Silla Sg, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.6% from 8.2% five years ago. 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Silla Sg has done well to pay down its current liabilities to 30% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Silla Sg's ROCE

Bringing it all together, while we're somewhat encouraged by Silla Sg's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 33% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you'd like to know more about Silla Sg, we've spotted 4 warning signs, and 1 of them can't be ignored.

While Silla Sg 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.