RingNet (KOSDAQ:042500) Is Doing The Right Things To Multiply Its Share Price

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in RingNet's (KOSDAQ:042500) returns on capital, so let's have a look.

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. To calculate this metric for RingNet, this is the formula:

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

0.11 = ₩7.4b ÷ (₩123b - ₩54b) (Based on the trailing twelve months to December 2020).

So, RingNet has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the IT industry average of 10%.

View our latest analysis for RingNet

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'd like to look at how RingNet has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For RingNet Tell Us?

RingNet is displaying some positive trends. Over the last five 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, 47% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

Another thing to note, RingNet has a high ratio of current liabilities to total assets of 44%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On RingNet's ROCE

To sum it up, RingNet has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Considering the stock has delivered 38% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

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

While RingNet 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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