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. Speaking of which, we noticed some great changes in GABIA's (KOSDAQ:079940) returns on capital, so let's have a 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. Analysts use this formula to calculate it for GABIA:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = ₩28b ÷ (₩245b - ₩53b) (Based on the trailing twelve months to September 2020).
Therefore, GABIA has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the IT industry average of 11% it's much better.
See our latest analysis for GABIA
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 want to delve into the historical earnings, revenue and cash flow of GABIA, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
The trends we've noticed at GABIA are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 15%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 111%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
Our Take On GABIA's ROCE
To sum it up, GABIA has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
While GABIA looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether A079940 is currently trading for a fair price.
While GABIA 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. 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.
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About KOSDAQ:A079940
Excellent balance sheet and slightly overvalued.
