Investors Met With Slowing Returns on Capital At LEMON (KOSDAQ:294140)

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So while LEMON (KOSDAQ:294140) has a high ROCE right now, lets see what we can decipher from how returns are changing.

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. The formula for this calculation on LEMON is:

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

0.30 = ₩21b ÷ (₩103b - ₩35b) (Based on the trailing twelve months to September 2020).

Therefore, LEMON has an ROCE of 30%. That's a fantastic return and not only that, it outpaces the average of 8.2% earned by companies in a similar industry.

See our latest analysis for LEMON

Historical performance is a great place to start when researching a stock so above you can see the gauge for LEMON's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of LEMON, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

Over the past , LEMON's ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. Although current returns are high, we'd need more evidence of underlying growth for it to look like a multi-bagger going forward.

The Bottom Line

While LEMON has impressive profitability from its capital, it isn't increasing that amount of capital. Although the market must be expecting these trends to improve because the stock has gained 14% over the last year. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you'd like to know more about LEMON, we've spotted 3 warning signs, and 1 of them is potentially serious.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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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