Our Take On The Returns On Capital At ELP (KOSDAQ:063760)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at ELP (KOSDAQ:063760), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

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 ELP, this is the formula:

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

0.077 = ₩5.4b ÷ (₩78b - ₩8.0b) (Based on the trailing twelve months to September 2020).

So, ELP has an ROCE of 7.7%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 9.8%.

Check out our latest analysis for ELP

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

What Can We Tell From ELP's ROCE Trend?

On the surface, the trend of ROCE at ELP doesn't inspire confidence. Over the last three years, returns on capital have decreased to 7.7% from 38% three years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by ELP's reinvestment in its own business, we're aware that returns are shrinking. And in the last three years, the stock has given away 46% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

ELP does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is significant...

While ELP 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.

If you decide to trade ELP, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.