Returns On Capital Are Showing Encouraging Signs At KOSESLtd (KOSDAQ:089890)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at KOSESLtd (KOSDAQ:089890) 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 KOSESLtd, this is the formula:

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

0.17 = ₩9.5b ÷ (₩72b - ₩18b) (Based on the trailing twelve months to December 2020).

Therefore, KOSESLtd has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 8.8% generated by the Semiconductor industry.

Check out our latest analysis for KOSESLtd

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

What Can We Tell From KOSESLtd's ROCE Trend?

KOSESLtd has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 17% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, KOSESLtd is utilizing 805% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 24%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that KOSESLtd has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

Our Take On KOSESLtd's ROCE

Overall, KOSESLtd gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And a remarkable 306% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a final note, we've found 2 warning signs for KOSESLtd that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.
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