Our Take On The Returns On Capital At Nongwoobio (KOSDAQ:054050)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Having said that, from a first glance at Nongwoobio (KOSDAQ:054050) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is 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. To calculate this metric for Nongwoobio, this is the formula:

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

0.036 = ₩8.7b ÷ (₩296b - ₩53b) (Based on the trailing twelve months to September 2020).

Thus, Nongwoobio has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Food industry average of 6.9%.

See our latest analysis for Nongwoobio

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 Nongwoobio's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Nongwoobio, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.6% from 6.9% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Nongwoobio's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Nongwoobio. And there could be an opportunity here if other metrics look good too, because the stock has declined 34% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Nongwoobio does have some risks though, and we've spotted 2 warning signs for Nongwoobio that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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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