Here's What's Concerning About EXEM's (KOSDAQ:205100) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at EXEM (KOSDAQ:205100) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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 EXEM is:

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

0.027 = ₩3.2b ÷ (₩131b - ₩8.5b) (Based on the trailing twelve months to September 2024).

So, EXEM has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Software industry average of 5.5%.

Check out our latest analysis for EXEM

In the above chart we have measured EXEM's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for EXEM .

So How Is EXEM's ROCE Trending?

When we looked at the ROCE trend at EXEM, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.7% from 5.3% five years ago. However it looks like EXEM 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From EXEM's ROCE

Bringing it all together, while we're somewhat encouraged by EXEM's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 44% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing to note, we've identified 1 warning sign with EXEM and understanding this should be part of your investment process.

While EXEM 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.