AfreecaTV (KOSDAQ:067160): Are Investors Overlooking Returns On Capital?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at the ROCE trend of AfreecaTV (KOSDAQ:067160) we really liked what we saw.

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 AfreecaTV is:

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

0.27 = ₩40b ÷ (₩258b - ₩108b) (Based on the trailing twelve months to September 2020).

Thus, AfreecaTV has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Interactive Media and Services industry average of 12%.

Check out our latest analysis for AfreecaTV

Above you can see how the current ROCE for AfreecaTV 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 AfreecaTV here for free.

The Trend Of ROCE

We like the trends that we're seeing from AfreecaTV. Over the last five years, returns on capital employed have risen substantially to 27%. The amount of capital employed has increased too, by 204%. 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.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 42% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line

All in all, it's terrific to see that AfreecaTV is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 168% 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.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation that compares the share price and estimated value.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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