If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Yw (KOSDAQ:051390) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What is it?
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 Yw, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.041 = ₩3.5b ÷ (₩115b - ₩31b) (Based on the trailing twelve months to September 2020).
Thus, Yw has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Communications industry average of 7.2%.
Check out our latest analysis for Yw
Historical performance is a great place to start when researching a stock so above you can see the gauge for Yw's ROCE against it's prior returns. If you'd like to look at how Yw 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 Yw's ROCE Trend?
While there are companies with higher returns on capital out there, we still find the trend at Yw promising. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 130% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 27% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.
The Bottom Line
To sum it up, Yw is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a solid 44% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Yw can keep these trends up, it could have a bright future ahead.
On a final note, we've found 2 warning signs for Yw that we think you should be aware of.
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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About KOSDAQ:A051390
Yw
Develops, supplies, and installs wired and wireless communication equipment in Japan, China, and Indonesia.
Flawless balance sheet, good value and pays a dividend.
