Returns On Capital Signal Tricky Times Ahead For EMRO (KOSDAQ:058970)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Having said that, from a first glance at EMRO (KOSDAQ:058970) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for EMRO, this is the formula:

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

0.087 = ₩7.3b ÷ (₩103b - ₩19b) (Based on the trailing twelve months to September 2024).

Therefore, EMRO has an ROCE of 8.7%. On its own that's a low return, but compared to the average of 5.1% generated by the Software industry, it's much better.

Check out our latest analysis for EMRO

Above you can see how the current ROCE for EMRO 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 EMRO for free.

What Can We Tell From EMRO's ROCE Trend?

In terms of EMRO's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 15% over the last three years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On EMRO's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that EMRO is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 3,675% to shareholders in the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you're still interested in EMRO it's worth checking out our FREE intrinsic value approximation for A058970 to see if it's trading at an attractive price in other respects.

While EMRO 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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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.