Rorze Systems (KOSDAQ:071280) Is Looking To Continue Growing Its 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? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Rorze Systems (KOSDAQ:071280) so let's look a bit deeper.

Understanding 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. Analysts use this formula to calculate it for Rorze Systems:

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

0.11 = ₩9.3b ÷ (₩119b - ₩35b) (Based on the trailing twelve months to December 2020).

Therefore, Rorze Systems has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Semiconductor industry average of 8.8% it's much better.

View our latest analysis for Rorze Systems

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 Rorze Systems' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Rorze Systems Tell Us?

Investors would be pleased with what's happening at Rorze Systems. Over the last four years, returns on capital employed have risen substantially to 11%. Basically the business is earning more per dollar of capital invested and in addition to that, 63% more capital is being employed now too. So we're very much inspired by what we're seeing at Rorze Systems thanks to its ability to profitably reinvest capital.

One more thing to note, Rorze Systems has decreased current liabilities to 30% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Bottom Line On Rorze Systems' ROCE

In summary, it's great to see that Rorze Systems 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 82% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a separate note, we've found 1 warning sign for Rorze Systems you'll probably want to know about.

While Rorze Systems 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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