Our Take On The Returns On Capital At Genians (KOSDAQ:263860)

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Although, when we looked at Genians (KOSDAQ:263860), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

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 Genians:

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

0.054 = ₩2.0b ÷ (₩42b - ₩4.2b) (Based on the trailing twelve months to September 2020).

Thus, Genians has an ROCE of 5.4%. In absolute terms, that's a low return and it also under-performs the Software industry average of 7.7%.

See our latest analysis for Genians

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 Genians, check out these free graphs here.

What Can We Tell From Genians' ROCE Trend?

In terms of Genians' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 18% over the last four years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Genians' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Genians is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 6.6% gain to shareholders who've held over the last three years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Genians does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

While Genians 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. 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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