Here's What To Make Of L&F's (KOSDAQ:066970) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating L&F (KOSDAQ:066970), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. To calculate this metric for L&F, this is the formula:

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

0.0062 = ₩2.0b ÷ (₩470b - ₩150b) (Based on the trailing twelve months to September 2020).

Thus, L&F has an ROCE of 0.6%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 6.6%.

Check out our latest analysis for L&F

Above you can see how the current ROCE for L&F compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for L&F.

What Does the ROCE Trend For L&F Tell Us?

We weren't thrilled with the trend because L&F's ROCE has reduced by 56% over the last five years, while the business employed 189% more capital. Usually this isn't ideal, but given L&F conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence L&F might not have received a full period of earnings contribution from it.

Our Take On L&F's ROCE

Bringing it all together, while we're somewhat encouraged by L&F's reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 427% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing, we've spotted 1 warning sign facing L&F that you might find interesting.

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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