Returns On Capital Signal Tricky Times Ahead For Asia Business Daily (KOSDAQ:127710)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. In light of that, when we looked at Asia Business Daily (KOSDAQ:127710) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Asia Business Daily is:

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

0.036 = ₩4.9b ÷ (₩175b - ₩40b) (Based on the trailing twelve months to December 2020).

So, Asia Business Daily has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Media industry average of 6.8%.

Check out our latest analysis for Asia Business Daily

Historical performance is a great place to start when researching a stock so above you can see the gauge for Asia Business Daily's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Asia Business Daily, check out these free graphs here.

How Are Returns Trending?

On the surface, the trend of ROCE at Asia Business Daily doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.6% from 15% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Asia Business Daily. However, despite the promising trends, the stock has fallen 22% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

On a final note, we found 4 warning signs for Asia Business Daily (1 doesn't sit too well with us) you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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