We Like These Underlying Trends At KC Feed (KOSDAQ:025880)

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, KC Feed (KOSDAQ:025880) 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. Analysts use this formula to calculate it for KC Feed:

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

0.021 = ₩1.4b ÷ (₩101b - ₩35b) (Based on the trailing twelve months to December 2020).

Therefore, KC Feed has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Food industry average of 6.8%.

Check out our latest analysis for KC Feed

Historical performance is a great place to start when researching a stock so above you can see the gauge for KC Feed's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of KC Feed, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

Shareholders will be relieved that KC Feed has broken into profitability. The company now earns 2.1% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

In Conclusion...

In summary, we're delighted to see that KC Feed has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with a respectable 76% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you want to know some of the risks facing KC Feed we've found 3 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

While KC Feed may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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