Should You Be Excited About JYP Entertainment's (KOSDAQ:035900) Returns On Capital?

What are the early trends we should look for to identify a stock that could 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. And in light of that, the trends we're seeing at JYP Entertainment's (KOSDAQ:035900) look very promising so lets take a look.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for JYP Entertainment, this is the formula:

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).

So, 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 8.2%.

View 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, you can check out the forecasts from the analysts covering JYP Entertainment here for free.

So How Is JYP Entertainment's ROCE Trending?

We like the trends that we're seeing from JYP Entertainment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 25%. The amount of capital employed has increased too, by 217%. So we're very much inspired by what we're seeing at JYP Entertainment thanks to its ability to profitably reinvest capital.

Our Take On JYP Entertainment's ROCE

In summary, it's great to see that JYP Entertainment can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 638% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

JYP Entertainment does have some risks though, and we've spotted 1 warning sign for JYP Entertainment that you might be interested in.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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