Ncsoft (KRX:036570) May Have Issues Allocating Its Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Ncsoft (KRX:036570) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Ncsoft:

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

0.036 = ₩137b ÷ (₩4.4t - ₩614b) (Based on the trailing twelve months to December 2023).

Thus, Ncsoft has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 6.9%.

Check out our latest analysis for Ncsoft

In the above chart we have measured Ncsoft's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Ncsoft for free.

What Does the ROCE Trend For Ncsoft Tell Us?

When we looked at the ROCE trend at Ncsoft, we didn't gain much confidence. Around five years ago the returns on capital were 25%, but since then they've fallen to 3.6%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line

We're a bit apprehensive about Ncsoft because despite more capital being deployed in the business, returns on that capital and sales have both fallen. It should come as no surprise then that the stock has fallen 53% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

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

While Ncsoft 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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