Here’s What’s Happening With Returns At Samhwa Networks (KOSDAQ:046390)

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. So on that note, Samhwa Networks (KOSDAQ:046390) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Samhwa Networks:

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

0.051 = ₩1.9b ÷ (₩39b - ₩1.7b) (Based on the trailing twelve months to September 2020).

So, Samhwa Networks has an ROCE of 5.1%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 8.2%.

View our latest analysis for Samhwa Networks

Above you can see how the current ROCE for Samhwa Networks compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Samhwa Networks here for free.

How Are Returns Trending?

Shareholders will be relieved that Samhwa Networks has broken into profitability. The company now earns 5.1% on its capital, because five years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

Our Take On Samhwa Networks' ROCE

To sum it up, Samhwa Networks is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a staggering 194% 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.

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

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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