SILICON2 (KOSDAQ:257720) Is Investing Its Capital With Increasing Efficiency

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. So when we looked at the ROCE trend of SILICON2 (KOSDAQ:257720) we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for SILICON2, this is the formula:

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

0.48 = ₩98b ÷ (₩393b - ₩187b) (Based on the trailing twelve months to June 2024).

So, SILICON2 has an ROCE of 48%. That's a fantastic return and not only that, it outpaces the average of 4.4% earned by companies in a similar industry.

Check out our latest analysis for SILICON2

In the above chart we have measured SILICON2'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 SILICON2 for free.

So How Is SILICON2's ROCE Trending?

We like the trends that we're seeing from SILICON2. The data shows that returns on capital have increased substantially over the last four years to 48%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 462%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 48% of the business, which is more than it was four years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

Our Take On SILICON2's ROCE

To sum it up, SILICON2 has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 1,020% total return over the last three years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if SILICON2 can keep these trends up, it could have a bright future ahead.

One final note, you should learn about the 2 warning signs we've spotted with SILICON2 (including 1 which is a bit concerning) .

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.