Returns On Capital Are Showing Encouraging Signs At Mercury (KOSDAQ:100590)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Mercury (KOSDAQ:100590) and its trend of ROCE, we really liked what we saw.

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 Mercury is:

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

0.039 = ₩3.4b ÷ (₩126b - ₩40b) (Based on the trailing twelve months to December 2020).

So, Mercury has an ROCE of 3.9%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 6.6%.

See our latest analysis for Mercury

Historical performance is a great place to start when researching a stock so above you can see the gauge for Mercury's ROCE against it's prior returns. If you're interested in investigating Mercury's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Mercury's ROCE Trending?

We're delighted to see that Mercury is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 3.9% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Mercury is utilizing 110% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

The Bottom Line

Long story short, we're delighted to see that Mercury's reinvestment activities have paid off and the company is now profitable. And with a respectable 33% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Mercury can keep these trends up, it could have a bright future ahead.

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

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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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