Investors Will Want Coupang's (NYSE:CPNG) Growth In ROCE To Persist

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Speaking of which, we noticed some great changes in Coupang's (NYSE:CPNG) returns on capital, so let's have a look.

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)

0.084 = US$425m ÷ (US$12b - US$6.5b) (Based on the trailing twelve months to September 2023).

Thus, Coupang has an ROCE of 8.4%. In absolute terms, that's a low return but it's around the Multiline Retail industry average of 10%.

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.

So How Is Coupang's ROCE Trending?

Coupang has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses four years ago, but now it's earning 8.4% which is a sight for sore eyes. Not only that, but the company is utilizing 388% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a side note, Coupang's current liabilities are still rather high at 56% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line 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. Given the stock has declined 12% in the last year, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

While Coupang looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether CPNG is currently trading for a fair price.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.