Is Pearl Abyss (KOSDAQ:263750) Likely To Turn Things Around?

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Pearl Abyss (KOSDAQ:263750) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Pearl Abyss, this is the formula:

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

0.19 = ₩166b ÷ (₩997b - ₩132b) (Based on the trailing twelve months to September 2020).

So, Pearl Abyss has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 8.4% generated by the Entertainment industry.

See our latest analysis for Pearl Abyss

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

So How Is Pearl Abyss' ROCE Trending?

In terms of Pearl Abyss' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 24% over the last three years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On Pearl Abyss' ROCE

Bringing it all together, while we're somewhat encouraged by Pearl Abyss' reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 26% over the last three years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing, we've spotted 1 warning sign facing Pearl Abyss that you might find interesting.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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