We're Watching These Trends At A-Jin IndustrialLtd (KOSDAQ:013310)

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think A-Jin IndustrialLtd (KOSDAQ:013310) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

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. 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 4.0%.

Check out our latest analysis for A-Jin IndustrialLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for A-Jin IndustrialLtd's ROCE against it's prior returns. If you'd like to look at how A-Jin IndustrialLtd 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

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. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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 side note, A-Jin IndustrialLtd has done well to pay down its current liabilities to 39% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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

We're a bit apprehensive about A-Jin IndustrialLtd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Long term shareholders who've owned the stock over the last three years have experienced a 24% depreciation in their investment, so it appears the market might not like these trends either. 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 3 warning signs for A-Jin IndustrialLtd (2 are a bit unpleasant) you should be aware of.

While A-Jin IndustrialLtd 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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