Investors Should Be Encouraged By SILICON2's (KOSDAQ:257720) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in SILICON2's (KOSDAQ:257720) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on SILICON2 is:

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

0.41 = ₩70b ÷ (₩311b - ₩142b) (Based on the trailing twelve months to March 2024).

Therefore, SILICON2 has an ROCE of 41%. That's a fantastic return and not only that, it outpaces the average of 6.5% earned by companies in a similar industry.

View our latest analysis for SILICON2

Above you can see how the current ROCE for SILICON2 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 analyst report for SILICON2 .

What The Trend Of ROCE Can Tell Us

The trends we've noticed at SILICON2 are quite reassuring. The data shows that returns on capital have increased substantially over the last four years to 41%. The amount of capital employed has increased too, by 399%. So we're very much inspired by what we're seeing at SILICON2 thanks to its ability to profitably reinvest capital.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 46% of the business, which is more than it was four years ago. And with current liabilities at those levels, that's pretty high.

The Bottom Line On SILICON2's ROCE

All in all, it's terrific to see that SILICON2 is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last year, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

SILICON2 does have some risks though, and we've spotted 2 warning signs for SILICON2 that you might be interested in.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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