Will the Promising Trends At Pavonine (KOSDAQ:177830) Continue?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Pavonine's (KOSDAQ:177830) returns on capital, so let's have a look.

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 Pavonine, this is the formula:

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

0.046 = ₩3.2b ÷ (₩142b - ₩71b) (Based on the trailing twelve months to September 2020).

Thus, Pavonine has an ROCE of 4.6%. On its own, that's a low figure but it's around the 5.6% average generated by the Electronic industry.

See our latest analysis for Pavonine

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 want to delve into the historical earnings, revenue and cash flow of Pavonine, check out these free graphs here.

The Trend Of ROCE

Shareholders will be relieved that Pavonine has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 4.6% on its capital. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. 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. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

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 50% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

What We Can Learn From Pavonine's ROCE

As discussed above, Pavonine appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 95% return over the last five years. In light of that, we think it's worth looking further into this stock because if Pavonine can keep these trends up, it could have a bright future ahead.

If you'd like to know more about Pavonine, we've spotted 3 warning signs, and 1 of them makes us a bit uncomfortable.

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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