Returns On Capital Are Showing Encouraging Signs At LS Networks (KRX:000680)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at LS Networks (KRX:000680) and its trend of ROCE, we really liked what we saw.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for LS Networks, this is the formula:

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

0.018 = ₩188b ÷ (₩11t - ₩180b) (Based on the trailing twelve months to September 2024).

So, LS Networks has an ROCE of 1.8%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 12%.

Check out our latest analysis for LS Networks

Historical performance is a great place to start when researching a stock so above you can see the gauge for LS Networks' ROCE against it's prior returns. If you're interested in investigating LS Networks' past further, check out this free graph covering LS Networks' past earnings, revenue and cash flow.

How Are Returns Trending?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The data shows that returns on capital have increased substantially over the last five years to 1.8%. The amount of capital employed has increased too, by 922%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a related note, the company's ratio of current liabilities to total assets has decreased to 1.7%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that LS Networks has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From LS Networks' ROCE

In summary, it's great to see that LS Networks can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 64% return over the last five years. 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.

LS Networks does have some risks though, and we've spotted 1 warning sign for LS Networks that you might be interested in.

While LS Networks 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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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.