There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we’d like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Coupang’s (NYSE:CPNG) returns on capital, so let’s have a look.
For those that aren’t sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Coupang:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.042 = US$340m ÷ (US$16b – US$8.2b) (Based on the trailing twelve months to September 2024).
So, Coupang has an ROCE of 4.2%. In absolute terms, that’s a low return and it also under-performs the Multiline Retail industry average of 12%.
Check out 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, you can check out the forecasts from the analysts covering Coupang for free.
Coupang has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it’s earning 4.2% which is a sight for sore eyes. In addition to that, Coupang is employing 687% more capital than previously which is expected of a company that’s trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
In another part of our analysis, we noticed that the company’s ratio of current liabilities to total assets decreased to 50%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Coupang has grown its returns without a reliance on increasing their current liabilities, which we’re very happy with. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.
Overall, Coupang gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And given the stock has remained rather flat over the last three years, there might be an opportunity here if other metrics are strong. That being the case, research into the company’s current valuation metrics and future prospects seems fitting.
