Investors Will Want Sungchang Autotech's (KOSDAQ:080470) Growth In ROCE To Persist

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Sungchang Autotech (KOSDAQ:080470) so let's look a bit deeper.

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 Sungchang Autotech is:

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

0.041 = ₩3.3b ÷ (₩168b - ₩89b) (Based on the trailing twelve months to March 2024).

Thus, Sungchang Autotech has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 8.5%.

View our latest analysis for Sungchang Autotech

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

What Does the ROCE Trend For Sungchang Autotech Tell Us?

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 4.1%. Basically the business is earning more per dollar of capital invested and in addition to that, 47% more capital is being employed now too. So we're very much inspired by what we're seeing at Sungchang Autotech thanks to its ability to profitably reinvest capital.

On a side note, Sungchang Autotech's current liabilities are still rather high at 53% 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

All in all, it's terrific to see that Sungchang Autotech is reaping the rewards from prior investments and is growing its capital base. Given the stock has declined 47% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

Sungchang Autotech does have some risks, we noticed 4 warning signs (and 2 which shouldn't be ignored) we think you should know about.

While Sungchang Autotech 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.

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