JYP Entertainment (KOSDAQ:035900): Are Investors Overlooking Returns On Capital?

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. So when we looked at the ROCE trend of JYP Entertainment (KOSDAQ:035900) we really liked what we saw.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on JYP Entertainment is:

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

0.25 = ₩47b ÷ (₩218b - ₩34b) (Based on the trailing twelve months to September 2020).

Thus, JYP Entertainment has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Entertainment industry average of 7.6%.

See our latest analysis for JYP Entertainment

In the above chart we have measured JYP Entertainment'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 JYP Entertainment.

What Can We Tell From JYP Entertainment's ROCE Trend?

JYP Entertainment is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 25%. Basically the business is earning more per dollar of capital invested and in addition to that, 217% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Key Takeaway

To sum it up, JYP Entertainment has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 895% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing, we've spotted 1 warning sign facing JYP Entertainment that you might find interesting.

JYP Entertainment is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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