Will AhnLab's (KOSDAQ:053800) Growth In ROCE Persist?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. So on that note, AhnLab (KOSDAQ:053800) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for AhnLab:

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

0.088 = ₩19b ÷ (₩272b - ₩59b) (Based on the trailing twelve months to June 2020).

So, AhnLab has an ROCE of 8.8%. Even though it's in line with the industry average of 8.8%, it's still a low return by itself.

See our latest analysis for AhnLab

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're interested in investigating AhnLab's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The data shows that returns on capital have increased substantially over the last five years to 8.8%. The amount of capital employed has increased too, by 38%. So we're very much inspired by what we're seeing at AhnLab thanks to its ability to profitably reinvest capital.

The Bottom Line

In summary, it's great to see that AhnLab can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 58% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

While AhnLab looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether A053800 is currently trading for a fair price.

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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