Slowing Rates Of Return At KCTC (KRX:009070) Leave Little Room For Excitement

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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 investigating KCTC (KRX:009070), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for KCTC:

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

0.065 = ₩20b ÷ (₩441b - ₩130b) (Based on the trailing twelve months to December 2020).

Thus, KCTC has an ROCE of 6.5%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.5%.

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

What Can We Tell From KCTC's ROCE Trend?

In terms of KCTC's historical ROCE trend, it doesn't exactly demand attention. The company has employed 27% more capital in the last five years, and the returns on that capital have remained stable at 6.5%. 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 Key Takeaway

In summary, KCTC has simply been reinvesting capital and generating the same low rate of return as before. Although the market must be expecting these trends to improve because the stock has gained 96% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing: We've identified 4 warning signs with KCTC (at least 2 which make us uncomfortable) , and understanding them would certainly be useful.

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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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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