There Are Reasons To Feel Uneasy About Cafe24's (KOSDAQ:042000) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Cafe24 (KOSDAQ:042000), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for Cafe24:

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

0.019 = ₩4.3b ÷ (₩332b - ₩106b) (Based on the trailing twelve months to March 2024).

Therefore, Cafe24 has an ROCE of 1.9%. Ultimately, that's a low return and it under-performs the IT industry average of 8.3%.

See our latest analysis for Cafe24

In the above chart we have measured Cafe24's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Cafe24 .

What Can We Tell From Cafe24's ROCE Trend?

The trend of ROCE doesn't look fantastic because it's fallen from 8.7% five years ago, while the business's capital employed increased by 37%. That being said, Cafe24 raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Cafe24 might not have received a full period of earnings contribution from it.

The Bottom Line On Cafe24's ROCE

To conclude, we've found that Cafe24 is reinvesting in the business, but returns have been falling. Unsurprisingly then, the total return to shareholders over the last five years has been flat. 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.

Like most companies, Cafe24 does come with some risks, and we've found 2 warning signs that you should be aware of.

While Cafe24 isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.