We're Watching These Trends At Settlebank (KOSDAQ:234340)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Settlebank (KOSDAQ:234340) 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)?

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. Analysts use this formula to calculate it for Settlebank:

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

0.098 = ₩11b ÷ (₩226b - ₩114b) (Based on the trailing twelve months to September 2020).

Therefore, Settlebank has an ROCE of 9.8%. In absolute terms, that's a low return but it's around the IT industry average of 11%.

See our latest analysis for Settlebank

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 Settlebank, check out these free graphs here.

How Are Returns Trending?

Over the past one year, Settlebank's ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Settlebank doesn't end up being a multi-bagger in a few years time.

Another point to note, we noticed the company has increased current liabilities over the last one year. This is intriguing because if current liabilities hadn't increased to 50% of total assets, this reported ROCE would probably be less than9.8% because total capital employed would be higher.The 9.8% ROCE could be even lower if current liabilities weren't 50% of total assets, because the the formula would show a larger base of total capital employed. So with current liabilities at such high levels, this effectively means the likes of suppliers or short-term creditors are funding a meaningful part of the business, which in some instances can bring some risks.

What We Can Learn From Settlebank's ROCE

In a nutshell, Settlebank has been trudging along with the same returns from the same amount of capital over the last one year. Although the market must be expecting these trends to improve because the stock has gained 13% over the last year. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you'd like to know about the risks facing Settlebank, we've discovered 1 warning sign that you should be aware of.

While Settlebank 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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