Returns On Capital At Lotte Data Communication (KRX:286940) Paint An Interesting Picture

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 Lotte Data Communication (KRX:286940) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

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 Lotte Data Communication is:

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

0.11 = ₩45b ÷ (₩606b - ₩178b) (Based on the trailing twelve months to September 2020).

Therefore, Lotte Data Communication has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the IT industry average of 10%.

View our latest analysis for Lotte Data Communication

Above you can see how the current ROCE for Lotte Data Communication compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Lotte Data Communication here for free.

What Can We Tell From Lotte Data Communication's ROCE Trend?

Over the past two years, Lotte Data Communication's ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if Lotte Data Communication doesn't end up being a multi-bagger in a few years time.

On a side note, Lotte Data Communication has done well to reduce current liabilities to 29% of total assets over the last two years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Key Takeaway

In summary, Lotte Data Communication isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has declined 16% over the last year, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you want to know some of the risks facing Lotte Data Communication we've found 3 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

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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