Should You Be Impressed By Daewon Sanup's (KOSDAQ:005710) Returns on Capital?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Daewon Sanup (KOSDAQ:005710) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Daewon Sanup, this is the formula:

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

0.032 = ₩11b ÷ (₩516b - ₩176b) (Based on the trailing twelve months to September 2020).

So, Daewon Sanup has an ROCE of 3.2%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 4.1%.

Check out our latest analysis for Daewon Sanup

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Daewon Sanup, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

The returns on capital haven't changed much for Daewon Sanup in recent years. The company has consistently earned 3.2% for the last five years, and the capital employed within the business has risen 62% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Our Take On Daewon Sanup's ROCE

In summary, Daewon Sanup has simply been reinvesting capital and generating the same low rate of return as before. And with the stock having returned a mere 26% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One more thing to note, we've identified 2 warning signs with Daewon Sanup and understanding these should be part of your investment process.

While Daewon Sanup 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. 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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