Here's What's Concerning About Nice Information & Telecommunication's (KOSDAQ:036800) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Nice Information & Telecommunication (KOSDAQ:036800) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Nice Information & Telecommunication:

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

0.15 = ₩36b ÷ (₩715b - ₩472b) (Based on the trailing twelve months to December 2020).

Therefore, Nice Information & Telecommunication has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the IT industry average of 10% it's much better.

Check out our latest analysis for Nice Information & Telecommunication

Above you can see how the current ROCE for Nice Information & Telecommunication compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Nice Information & Telecommunication here for free.

How Are Returns Trending?

On the surface, the trend of ROCE at Nice Information & Telecommunication doesn't inspire confidence. To be more specific, ROCE has fallen from 27% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Another thing to note, Nice Information & Telecommunication has a high ratio of current liabilities to total assets of 66%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Nice Information & Telecommunication's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Nice Information & Telecommunication is reinvesting for growth and has higher sales as a result. However, total returns to shareholders over the last five years have been flat, which could indicate these growth trends potentially aren't accounted for yet by investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you'd like to know about the risks facing Nice Information & Telecommunication, we've discovered 2 warning signs that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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