Some Investors May Be Worried About Studio Dragon's (KOSDAQ:253450) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Studio Dragon (KOSDAQ:253450), we don't think it's current trends fit the mold of a multi-bagger.

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

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. To calculate this metric for Studio Dragon, this is the formula:

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

0.079 = ₩49b ÷ (₩757b - ₩132b) (Based on the trailing twelve months to December 2020).

Therefore, Studio Dragon has an ROCE of 7.9%. In absolute terms, that's a low return but it's around the Entertainment industry average of 6.8%.

See our latest analysis for Studio Dragon

Above you can see how the current ROCE for Studio Dragon compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Studio Dragon's ROCE Trend?

Unfortunately, the trend isn't great with ROCE falling from 14% four years ago, while capital employed has grown 295%. That being said, Studio Dragon raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Studio Dragon probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a side note, Studio Dragon has done well to pay down its current liabilities to 17% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Studio Dragon's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Studio Dragon. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you want to continue researching Studio Dragon, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Studio Dragon may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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