Here's What To Make Of Linkgenesis' (KOSDAQ:219420) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Linkgenesis (KOSDAQ:219420) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. The formula for this calculation on Linkgenesis is:

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

0.086 = ₩2.9b ÷ (₩41b - ₩8.0b) (Based on the trailing twelve months to September 2020).

So, Linkgenesis has an ROCE of 8.6%. In absolute terms, that's a low return but it's around the IT industry average of 11%.

See our latest analysis for Linkgenesis

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

So How Is Linkgenesis' ROCE Trending?

In terms of Linkgenesis' historical ROCE movements, the trend isn't fantastic. Over the last four years, returns on capital have decreased to 8.6% from 15% four years ago. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 19%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

What We Can Learn From Linkgenesis' ROCE

While returns have fallen for Linkgenesis in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 19% over the last three years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

If you'd like to know more about Linkgenesis, we've spotted 4 warning signs, and 1 of them is concerning.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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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