Our Take On The Returns On Capital At Dong-A Hwa SungLtd (KOSDAQ:041930)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after investigating Dong-A Hwa SungLtd (KOSDAQ:041930), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Dong-A Hwa SungLtd is:

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

0.098 = ₩12b ÷ (₩256b - ₩130b) (Based on the trailing twelve months to September 2020).

So, Dong-A Hwa SungLtd has an ROCE of 9.8%. In absolute terms, that's a low return, but it's much better than the Auto Components industry average of 4.1%.

View our latest analysis for Dong-A Hwa SungLtd

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 Dong-A Hwa SungLtd, check out these free graphs here.

What Does the ROCE Trend For Dong-A Hwa SungLtd Tell Us?

In terms of Dong-A Hwa SungLtd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 23%, but since then they've fallen to 9.8%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a separate but related note, it's important to know that Dong-A Hwa SungLtd has a current liabilities to total assets ratio of 51%, which we'd consider pretty high. 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.

The Key Takeaway

To conclude, we've found that Dong-A Hwa SungLtd is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 206% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing: We've identified 4 warning signs with Dong-A Hwa SungLtd (at least 1 which is potentially serious) , and understanding them would certainly be useful.

While Dong-A Hwa SungLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

When trading Dong-A Hwa SungLtd or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.