There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Having said that, from a first glance at MOBASELtd (KOSDAQ:101330) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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. The formula for this calculation on MOBASELtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.015 = ₩7.1b ÷ (₩966b - ₩507b) (Based on the trailing twelve months to December 2020).
Therefore, MOBASELtd has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Tech industry average of 11%.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how MOBASELtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
When we looked at the ROCE trend at MOBASELtd, we didn't gain much confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 1.5%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
On a side note, MOBASELtd's current liabilities have increased over the last five years to 53% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 1.5%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.
Our Take On MOBASELtd's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for MOBASELtd. These trends are starting to be recognized by investors since the stock has delivered a 3.8% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.
On a final note, we found 3 warning signs for MOBASELtd (2 are significant) you should be aware of.
While MOBASELtd 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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