We Like These Underlying Return On Capital Trends At FarmStory (KOSDAQ:027710)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, FarmStory (KOSDAQ:027710) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for FarmStory, this is the formula:

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

0.13 = ₩43b ÷ (₩970b - ₩649b) (Based on the trailing twelve months to September 2024).

Therefore, FarmStory has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 7.6% it's much better.

View our latest analysis for FarmStory

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

The Trend Of ROCE

The trends we've noticed at FarmStory are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 13%. Basically the business is earning more per dollar of capital invested and in addition to that, 33% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a separate but related note, it's important to know that FarmStory has a current liabilities to total assets ratio of 67%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On FarmStory's ROCE

All in all, it's terrific to see that FarmStory is reaping the rewards from prior investments and is growing its capital base. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 24% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

On a final note, we found 3 warning signs for FarmStory (1 is a bit concerning) you should be aware of.

While FarmStory 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.