Does FINEDIGITAL (KOSDAQ:038950) Have The Makings Of A Multi-Bagger?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at FINEDIGITAL (KOSDAQ:038950) so let's look a bit deeper.

Understanding 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. The formula for this calculation on FINEDIGITAL is:

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

0.063 = ₩6.0b ÷ (₩105b - ₩8.8b) (Based on the trailing twelve months to September 2020).

Therefore, FINEDIGITAL has an ROCE of 6.3%. In absolute terms, that's a low return but it's around the Communications industry average of 7.2%.

See our latest analysis for FINEDIGITAL

Historical performance is a great place to start when researching a stock so above you can see the gauge for FINEDIGITAL's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of FINEDIGITAL, check out these free graphs here.

What Can We Tell From FINEDIGITAL's ROCE Trend?

FINEDIGITAL has broken into the black (profitability) and we're sure it's a sight for sore eyes. While the business was unprofitable in the past, it's now turned things around and is earning 6.3% on its capital. While returns have increased, the amount of capital employed by FINEDIGITAL has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

What We Can Learn From FINEDIGITAL's ROCE

As discussed above, FINEDIGITAL appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Considering the stock has delivered 21% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

On a final note, we've found 4 warning signs for FINEDIGITAL that we think you should be aware of.

While FINEDIGITAL isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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