The Returns At Cosmecca Korea (KOSDAQ:241710) Provide Us With Signs Of What's To Come

What are the early trends we should look for to identify a stock that could 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. Although, when we looked at Cosmecca Korea (KOSDAQ:241710), it didn't seem to tick all of these boxes.

Understanding 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 Cosmecca Korea, this is the formula:

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

0.031 = ₩6.9b ÷ (₩382b - ₩156b) (Based on the trailing twelve months to September 2020).

So, Cosmecca Korea has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Personal Products industry average of 6.8%.

Check out our latest analysis for Cosmecca Korea

In the above chart we have measured Cosmecca Korea's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Cosmecca Korea.

The Trend Of ROCE

On the surface, the trend of ROCE at Cosmecca Korea doesn't inspire confidence. Around five years ago the returns on capital were 20%, but since then they've fallen to 3.1%. However it looks like Cosmecca Korea might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Cosmecca Korea has done well to pay down its current liabilities to 41% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 41% is still pretty high, so those risks are still somewhat prevalent.

What We Can Learn From Cosmecca Korea's ROCE

Bringing it all together, while we're somewhat encouraged by Cosmecca Korea's reinvestment in its own business, we're aware that returns are shrinking. And in the last three years, the stock has given away 60% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Cosmecca Korea has the makings of a multi-bagger.

Cosmecca Korea does have some risks, we noticed 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.

While Cosmecca Korea isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

If you’re looking to trade Cosmecca Korea, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.