Stock Analysis

RedcapTour's (KOSDAQ:038390) Returns On Capital Not Reflecting Well On The Business

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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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at RedcapTour (KOSDAQ:038390) 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?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on RedcapTour is:

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

0.064 = ₩20b ÷ (₩454b - ₩141b) (Based on the trailing twelve months to December 2020).

So, RedcapTour has an ROCE of 6.4%. In absolute terms, that's a low return, but it's much better than the Transportation industry average of 4.2%.

See our latest analysis for RedcapTour

KOSDAQ:A038390 Return on Capital Employed March 29th 2021

Historical performance is a great place to start when researching a stock so above you can see the gauge for RedcapTour's ROCE against it's prior returns. If you'd like to look at how RedcapTour has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Unfortunately, the trend isn't great with ROCE falling from 9.9% five years ago, while capital employed has grown 34%. Usually this isn't ideal, but given RedcapTour 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 RedcapTour might not have received a full period of earnings contribution from it.

The Bottom Line

In summary, we're somewhat concerned by RedcapTour's diminishing returns on increasing amounts of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 42% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a final note, we found 3 warning signs for RedcapTour (1 can't be ignored) you should be aware of.

While RedcapTour 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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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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