LS Networks (KRX:000680) Is Looking To Continue Growing Its Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 LS Networks (KRX:000680) and its trend of ROCE, we really liked what we saw.

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. The formula for this calculation on LS Networks is:

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

0.011 = ₩7.4b ÷ (₩1.3t - ₩605b) (Based on the trailing twelve months to September 2023).

So, LS Networks has an ROCE of 1.1%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 5.0%.

Check out our latest analysis for LS Networks

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating LS Networks' past further, check out this free graph covering LS Networks' past earnings, revenue and cash flow.

The Trend Of ROCE

We're delighted to see that LS Networks is reaping rewards from its investments and has now broken into profitability. While the business is profitable now, it used to be incurring losses on invested capital five years ago. Additionally, the business is utilizing 33% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. LS Networks could be selling under-performing assets since the ROCE is improving.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 47% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

What We Can Learn From LS Networks' ROCE

From what we've seen above, LS Networks has managed to increase it's returns on capital all the while reducing it's capital base. And with a respectable 78% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if LS Networks can keep these trends up, it could have a bright future ahead.

On a final note, we found 4 warning signs for LS Networks (2 don't sit too well with us) you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.