Coupang (NYSE:CPNG) Is Looking To Continue Growing Its Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. With that in mind, we've noticed some promising trends at Coupang (NYSE:CPNG) so let's look a bit deeper.

What Is 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 Coupang, this is the formula:

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

0.044 = US$200m ÷ (US$9.7b - US$5.2b) (Based on the trailing twelve months to March 2023).

So, Coupang has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Multiline Retail industry average of 11%.

See our latest analysis for Coupang

Above you can see how the current ROCE for Coupang compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Coupang.

The Trend Of ROCE

Coupang has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making four years ago but is is now generating 4.4% on its capital. In addition to that, Coupang is employing 991% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

One more thing to note, Coupang has decreased current liabilities to 53% 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. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

Our Take On Coupang's ROCE

Long story short, we're delighted to see that Coupang's reinvestment activities have paid off and the company is now profitable. And with a respectable 47% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Coupang can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 1 warning sign with Coupang and understanding this should be part of your investment process.

While Coupang isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.