Is ESTsoft (KOSDAQ:047560) A Future Multi-bagger?

January 15, 2021

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, ESTsoft (KOSDAQ:047560) looks quite promising in regards to its trends of return on capital.

What is 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. The formula for this calculation on ESTsoft is:

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

0.031 = ₩2.5b ÷ (₩143b - ₩62b) (Based on the trailing twelve months to September 2020).

Therefore, ESTsoft has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Software industry average of 7.7%.

Check out our latest analysis for ESTsoft

Historical performance is a great place to start when researching a stock so above you can see the gauge for ESTsoft's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of ESTsoft, check out these free graphs here.

So How Is ESTsoft's ROCE Trending?

ESTsoft 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 3.1% which is a sight for sore eyes. In addition to that, ESTsoft is employing 24% more capital than previously which is expected of a company that's trying to break into profitability. 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.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 43% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

What We Can Learn From ESTsoft's ROCE

To the delight of most shareholders, ESTsoft has now broken into profitability. Given the stock has declined 20% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

ESTsoft does have some risks, we noticed 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

While ESTsoft 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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