What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Having said that, from a first glance at Korea Bio-GenLtd (KOSDAQ:318000) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What is it?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Korea Bio-GenLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = ₩3.7b ÷ (₩30b - ₩2.5b) (Based on the trailing twelve months to September 2020).
Therefore, Korea Bio-GenLtd has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 8.0% generated by the Chemicals industry.
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 Korea Bio-GenLtd's past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
Things have been pretty stable at Korea Bio-GenLtd, with its capital employed and returns on that capital staying somewhat the same for the last one year. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at Korea Bio-GenLtd in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.
The Key Takeaway
In a nutshell, Korea Bio-GenLtd has been trudging along with the same returns from the same amount of capital over the last one year. Although the market must be expecting these trends to improve because the stock has gained 38% 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 about the risks facing Korea Bio-GenLtd, we've discovered 3 warning signs that you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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