Can Meta Biomed (KOSDAQ:059210) Continue To Grow Its Returns On Capital?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. So when we looked at Meta Biomed (KOSDAQ:059210) and its trend of ROCE, we really liked what we saw.

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 Meta Biomed, this is the formula:

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

0.073 = ₩4.6b ÷ (₩109b - ₩46b) (Based on the trailing twelve months to September 2020).

Therefore, Meta Biomed has an ROCE of 7.3%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 13%.

View our latest analysis for Meta Biomed

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 want to delve into the historical earnings, revenue and cash flow of Meta Biomed, check out these free graphs here.

The Trend Of ROCE

Meta Biomed is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 22% over the last five years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

On a side note, Meta Biomed's current liabilities are still rather high at 42% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Meta Biomed's ROCE

In summary, we're delighted to see that Meta Biomed has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And since the stock has fallen 40% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

Meta Biomed does have some risks, we noticed 3 warning signs (and 1 which is significant) we think you should know about.

While Meta Biomed 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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