Should We Be Excited About The Trends Of Returns At Kocom (KOSDAQ:015710)?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Kocom (KOSDAQ:015710) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Kocom, this is the formula:

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

0.081 = ₩10b ÷ (₩150b - ₩22b) (Based on the trailing twelve months to September 2020).

Therefore, Kocom has an ROCE of 8.1%. In absolute terms, that's a low return but it's around the Communications industry average of 7.2%.

View our latest analysis for Kocom

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

What Can We Tell From Kocom's ROCE Trend?

When we looked at the ROCE trend at Kocom, we didn't gain much confidence. To be more specific, ROCE has fallen from 11% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line

In summary, we're somewhat concerned by Kocom's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 30% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

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

While Kocom 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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