If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Asia Seed's (KOSDAQ:154030) returns on capital, so let's have a look.
What is 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 Asia Seed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.062 = ₩1.7b ÷ (₩42b - ₩15b) (Based on the trailing twelve months to December 2020).
Thus, Asia Seed has an ROCE of 6.2%. On its own, that's a low figure but it's around the 7.3% average generated by the Food industry.
Check out our latest analysis for Asia Seed
Historical performance is a great place to start when researching a stock so above you can see the gauge for Asia Seed's ROCE against it's prior returns. If you're interested in investigating Asia Seed's past further, check out this free graph of past earnings, revenue and cash flow.
So How Is Asia Seed's ROCE Trending?
We're delighted to see that Asia Seed is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 6.2% on its capital. And unsurprisingly, like most companies trying to break into the black, Asia Seed is utilizing 98% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 35%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.
In Conclusion...
Overall, Asia Seed gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 51% return over the last three years. In light of that, we think it's worth looking further into this stock because if Asia Seed can keep these trends up, it could have a bright future ahead.
If you want to know some of the risks facing Asia Seed we've found 3 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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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About KOSDAQ:A154030
ASIA SEEDLtd
Engages in the development and sale of seeds for vegetables and fruits in South Korea and internationally.
Flawless balance sheet and slightly overvalued.
