Capital Allocation Trends At OPTUS Pharmaceutical (KOSDAQ:131030) Aren't Ideal

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at OPTUS Pharmaceutical (KOSDAQ:131030) and its ROCE trend, we weren't exactly thrilled.

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 OPTUS Pharmaceutical, this is the formula:

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

0.059 = ₩8.5b ÷ (₩167b - ₩21b) (Based on the trailing twelve months to December 2024).

So, OPTUS Pharmaceutical has an ROCE of 5.9%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 8.4%.

Check out our latest analysis for OPTUS Pharmaceutical

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 OPTUS Pharmaceutical's past further, check out this free graph covering OPTUS Pharmaceutical's past earnings, revenue and cash flow.

What Does the ROCE Trend For OPTUS Pharmaceutical Tell Us?

When we looked at the ROCE trend at OPTUS Pharmaceutical, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.9% from 14% 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. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From OPTUS Pharmaceutical'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 OPTUS Pharmaceutical. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

On a final note, we found 3 warning signs for OPTUS Pharmaceutical (2 make us uncomfortable) you should be aware of.

While OPTUS Pharmaceutical 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.