Yahoo Finance Coupang (NYSE:CPNG) Shareholders Will Want The ROCE Trajectory To Continue
There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. So when we looked at Coupang (NYSE:CPNG) and its trend of ROCE, 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. The formula for this calculation on Coupang is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.062 = US$464m ÷ (US$15b - US$7.4b) (Based on the trailing twelve months to March 2024).
Therefore, Coupang has an ROCE of 6.2%. 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 analyst report for Coupang .
What The Trend Of ROCE Can Tell Us
The fact that Coupang is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 6.2% which is a sight for sore eyes. In addition to that, Coupang is employing 1,707% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
On a related note, the company's ratio of current liabilities to total assets has decreased to 50%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.
The Key Takeaway
Long story short, we're delighted to see that Coupang's reinvestment activities have paid off and the company is now profitable. And since the stock has fallen 49% over the last three years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.
One more thing to note, we've identified 1 warning sign with Coupang and understanding it should be part of your investment process.
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. 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.
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