YounglimwonSoftLabLtd (KOSDAQ:060850) Is Reinvesting At Lower Rates Of Return

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. However, after investigating YounglimwonSoftLabLtd (KOSDAQ:060850), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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. To calculate this metric for YounglimwonSoftLabLtd, this is the formula:

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

0.049 = ₩2.5b ÷ (₩63b - ₩12b) (Based on the trailing twelve months to September 2024).

Thus, YounglimwonSoftLabLtd has an ROCE of 4.9%. Even though it's in line with the industry average of 5.0%, it's still a low return by itself.

Check out our latest analysis for YounglimwonSoftLabLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for YounglimwonSoftLabLtd's ROCE against it's prior returns. If you'd like to look at how YounglimwonSoftLabLtd has performed in the past in other metrics, you can view this free graph of YounglimwonSoftLabLtd's past earnings, revenue and cash flow.

So How Is YounglimwonSoftLabLtd's ROCE Trending?

In terms of YounglimwonSoftLabLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 4.9% from 18% five years ago. However it looks like YounglimwonSoftLabLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, YounglimwonSoftLabLtd has decreased its current liabilities to 18% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by YounglimwonSoftLabLtd's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 46% over the last three years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think YounglimwonSoftLabLtd has the makings of a multi-bagger.

One final note, you should learn about the 5 warning signs we've spotted with YounglimwonSoftLabLtd (including 2 which make us uncomfortable) .

While YounglimwonSoftLabLtd 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.