Here's What To Make Of KCTC's (KRX:009070) 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? 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. However, after briefly looking over the numbers, we don't think KCTC (KRX:009070) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for KCTC, this is the formula:

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

0.05 = ₩17b ÷ (₩445b - ₩108b) (Based on the trailing twelve months to September 2020).

Therefore, KCTC has an ROCE of 5.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.0%.

Check out our latest analysis for KCTC

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

So How Is KCTC's ROCE Trending?

The returns on capital haven't changed much for KCTC in recent years. Over the past five years, ROCE has remained relatively flat at around 5.0% and the business has deployed 42% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line

Long story short, while KCTC has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 43% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you want to know some of the risks facing KCTC we've found 3 warning signs (1 can't be ignored!) that you should be aware of before investing here.

While KCTC 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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