Returns On Capital At A-Jin IndustrialLtd (KOSDAQ:013310) Paint An Interesting Picture

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at A-Jin IndustrialLtd (KOSDAQ:013310), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for A-Jin IndustrialLtd, this is the formula:

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

0.039 = ₩16b ÷ (₩678b - ₩265b) (Based on the trailing twelve months to September 2020).

Thus, A-Jin IndustrialLtd has an ROCE of 3.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.1%.

Check out our latest analysis for A-Jin IndustrialLtd

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 A-Jin IndustrialLtd, check out these free graphs here.

How Are Returns Trending?

When we looked at the ROCE trend at A-Jin IndustrialLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.9% from 19% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, A-Jin IndustrialLtd has decreased its current liabilities to 39% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On A-Jin IndustrialLtd's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for A-Jin IndustrialLtd have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 23% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we found 4 warning signs for A-Jin IndustrialLtd (2 can't be ignored) you should be aware of.

While A-Jin IndustrialLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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