Will KOSESLtd's (KOSDAQ:089890) Growth In ROCE Persist?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on KOSESLtd is:

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

0.18 = ₩10.0b ÷ (₩87b - ₩31b) (Based on the trailing twelve months to September 2020).

Therefore, KOSESLtd has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Semiconductor industry average of 9.8% it's much better.

See 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 want to delve into the historical earnings, revenue and cash flow of KOSESLtd, check out these free graphs here.

The Trend Of ROCE

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 18% which is a sight for sore eyes. In addition to that, KOSESLtd is employing 1,110% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

One more thing to note, KOSESLtd has decreased current liabilities to 35% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Bottom Line

Long story short, we're delighted to see that KOSESLtd's reinvestment activities have paid off and the company is now profitable. And a remarkable 412% 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.

If you want to continue researching KOSESLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.

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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