Yahoo Finance There Are Reasons To Feel Uneasy About Gravity's (NASDAQ:GRVY) Returns On Capital
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, while the ROCE is currently high for Gravity (NASDAQ:GRVY), we aren't jumping out of our chairs because returns are decreasing.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Gravity is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.32 = ₩149b ÷ (₩578b - ₩106b) (Based on the trailing twelve months to December 2023).
Therefore, Gravity has an ROCE of 32%. In absolute terms that's a great return and it's even better than the Entertainment industry average of 11%.
View our latest analysis for Gravity
Historical performance is a great place to start when researching a stock so above you can see the gauge for Gravity's ROCE against it's prior returns. If you'd like to look at how Gravity has performed in the past in other metrics, you can view this free graph of Gravity's past earnings, revenue and cash flow.
What Can We Tell From Gravity's ROCE Trend?
When we looked at the ROCE trend at Gravity, we didn't gain much confidence. To be more specific, while the ROCE is still high, it's fallen from 43% where it was five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
On a related note, Gravity has decreased its current liabilities to 18% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
Our Take On Gravity's ROCE
While returns have fallen for Gravity in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 8.4% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.
Gravity could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for GRVY on our platform quite valuable.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.
