Investors Shouldn't Overlook Korbank's (WSE:KOR) Impressive Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at the ROCE trend of Korbank (WSE:KOR) we really liked what we saw.

Understanding 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 Korbank:

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

0.21 = zł7.6m ÷ (zł45m - zł8.1m) (Based on the trailing twelve months to March 2021).

So, Korbank has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 8.6% earned by companies in a similar industry.

View our latest analysis for Korbank

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 Korbank, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

Investors would be pleased with what's happening at Korbank. The data shows that returns on capital have increased substantially over the last five years to 21%. The amount of capital employed has increased too, by 312%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

One more thing to note, Korbank has decreased current liabilities to 18% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

In Conclusion...

In summary, it's great to see that Korbank can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing: We've identified 4 warning signs with Korbank (at least 1 which makes us a bit uncomfortable) , and understanding them would certainly be useful.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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