Will Cosmax (KRX:192820) Multiply In Value Going Forward?

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. 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. In light of that, when we looked at Cosmax (KRX:192820) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. The formula for this calculation on Cosmax is:

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

0.13 = ₩72b ÷ (₩1.2t - ₩714b) (Based on the trailing twelve months to September 2020).

Thus, Cosmax has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Personal Products industry average of 6.8% it's much better.

See our latest analysis for Cosmax

Above you can see how the current ROCE for Cosmax compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Cosmax here for free.

What Can We Tell From Cosmax's ROCE Trend?

On the surface, the trend of ROCE at Cosmax doesn't inspire confidence. Around five years ago the returns on capital were 27%, but since then they've fallen to 13%. However it looks like Cosmax 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.

Another thing to note, Cosmax has a high ratio of current liabilities to total assets of 57%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Cosmax's ROCE

Bringing it all together, while we're somewhat encouraged by Cosmax's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 15% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a final note, we found 2 warning signs for Cosmax (1 makes us a bit uncomfortable) you should be aware of.

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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