What Do The Returns At Daedong Gear (KOSDAQ:008830) Mean Going Forward?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 Daedong Gear's (KOSDAQ:008830) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Daedong Gear is:

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

0.043 = ₩4.3b ÷ (₩191b - ₩90b) (Based on the trailing twelve months to September 2020).

Therefore, Daedong Gear has an ROCE of 4.3%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.1%.

See our latest analysis for Daedong Gear

Historical performance is a great place to start when researching a stock so above you can see the gauge for Daedong Gear's ROCE against it's prior returns. If you'd like to look at how Daedong Gear has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 4.3%. Basically the business is earning more per dollar of capital invested and in addition to that, 35% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a side note, Daedong Gear's current liabilities are still rather high at 47% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

All in all, it's terrific to see that Daedong Gear is reaping the rewards from prior investments and is growing its capital base. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 54% return over the last five years. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing: We've identified 3 warning signs with Daedong Gear (at least 1 which shouldn't be ignored) , and understanding these would certainly be useful.

While Daedong Gear 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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