Returns At NHN (KRX:181710) Are On The Way Up

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Speaking of which, we noticed some great changes in NHN's (KRX:181710) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

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 NHN, this is the formula:

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

0.048 = ₩95b ÷ (₩2.6t - ₩559b) (Based on the trailing twelve months to December 2020).

Thus, NHN has an ROCE of 4.8%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 8.2%.

View our latest analysis for NHN

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

What Does the ROCE Trend For NHN Tell Us?

NHN has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 4.8% which is a sight for sore eyes. Not only that, but the company is utilizing 24% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

In Conclusion...

To the delight of most shareholders, NHN has now broken into profitability. Since the stock has only returned 33% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

Like most companies, NHN does come with some risks, and we've found 1 warning sign that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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