Be Wary Of Oricom (KOSDAQ:010470) And Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Oricom (KOSDAQ:010470) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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 Oricom is:

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

0.091 = ₩12b ÷ (₩200b - ₩66b) (Based on the trailing twelve months to March 2024).

Thus, Oricom has an ROCE of 9.1%. In absolute terms, that's a low return, but it's much better than the Media industry average of 4.3%.

View our latest analysis for Oricom

Historical performance is a great place to start when researching a stock so above you can see the gauge for Oricom's ROCE against it's prior returns. If you'd like to look at how Oricom has performed in the past in other metrics, you can view this free graph of Oricom's past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at Oricom doesn't inspire confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 9.1%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Oricom has done well to pay down its current liabilities to 33% of total assets. That could partly explain why the ROCE has dropped. 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Oricom's ROCE

While returns have fallen for Oricom in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Furthermore the stock has climbed 66% over the last five years, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Oricom does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is concerning...

While Oricom may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.

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